According to a recent RTE radio programme in a ghost estate in Co. Longford there is a man driving a red Maserati with a sticker on the back window that reads "it seemed like a good idea at the time". Lots of other things seemed like a good idea at the time – easy credit, 40 year mortgages, an apartment in Bulgaria, with another apartment in the south of Spain, and that must have helicopter for the Galway races.
Indeed if we ever need confirmation of the Greek proverb "those whom the gods wish to destroy they first drive mad" we only need to look at the Irish property market from 2002 to 2007. The great gold rush was a rush to destruction and was presided over by an utterly dysfunctional regulatory and political system that shouted down dissenting voices. It must never happen again.
The country now depends on the lender of last resort. We have lost much of the economic sovereignty that was slowly and painfully gained since independence in 1922.
So let’s be honest and frank about the actual situation. We are not in a good position.
Our banking system depends on the ECB and for day-to-day funding. Government finances depend on the bailout fund to finance spending. So how do we get to a better place?
We cannot magic away our problems and we must be clearheaded and realistic about the situation we face and pragmatic in how we deal with difficult issues. We must be guided by an approach, which seeks to find practical solutions to real problems. There is no silver bullet.
During the recent general election campaign, as a candidate, you couldn’t get off a doorstep. I have never seen voters so engaged in what they want. Discussions were all about national issues.
The Irish people know that success cannot be achieved overnight. They know that we face a very challenging situation. But they want their new government to be upfront and straight about what needs to be done. They want their government to communicate in clear language. Older voters were and are worried about the prospects for their children.
Its estimated that it takes approximately €300,000 of public and private money to rear and educate a graduate to the age of 21. Every 10,000 graduates lost to emigration is a loss of human capital investment of €3 billion to this state. The adjustment in people’s lives has been really hard to comprehend, particularly over such a short time. Of course the people I met on the canvas were angry, but were also realistic about what needs to be done. But above all, people want hope that there is a way out of this crisis and that a realistic plan can be put in place.
The government has moved quickly to recapitalise and restructure the banks and directed them to focus their lending and their banking activities in the Irish economy. The banks themselves now have a major job to do to restore trust and confidence in order to win back lost trust and reverse the outflow of deposits from their banks. I know bankers are battered, but now is the time for real leadership from the directors and senior managers of our banks.
I would like to see a return to a more traditional banking style where local branch managers and their teams and their relationship with their personal and business customers are central. I would like to see directors and senior managers down at branch level on a regular basis engaging with their customers, knowing what a real business is about and understanding why advancing credit is so important to the prospects of the economy.
Part of the government’s multi task approach is a commitment to an ongoing robust engagement with Europe and a determination to renegotiate elements of the bailout deal. They said it couldn’t be done but we have made a decent start. The minimum wage has been restored, the ECB has agreed to ongoing support for our banks and will accept lower quality collateral for doing so. And it has also agreed that no more bank loans will be transferred to NAMA, which would have further depleted bank capital ratios.
Our engagement with the troika will continue in the months and years ahead. We know what we want to achieve – the total level of debt and the interest payable on it must be sustainable. We will not allow ourselves to be bullied or intimidated in these ongoing negotiations. Solemn guarantees on taxation given by the European Union during the Lisbon referendum will not be reneged on. Comments recently made by the President highlight the importance of our corporate tax rate and the certainty it offers to those who wish to invest in Ireland. I welcome the recent comments of the Dutch Finance Minister who pointed out that direct taxation is a matter for countries themselves, so member states have to decide what level of taxation is appropriate. We will defend at all times this key element of our economic strategy.
And as regards the European Union – The European Union doesn’t belong to Germany or France or to any of the other big countries of Europe. The future of Europe belongs to all Europeans. We reject any kind of scapegoating of Ireland or any other European country.
The financial and banking problems which Ireland and other European countries are now experiencing are partly a consequence of financial deregulation, which was actively encouraged by the European Union itself and partly a result of lax central bank regulation by member states and the ECB. The ECB had access to all the data on inter-bank capital flows in Europe and it sat on it’s hands while imbalances grew ever more dangerous. A solution to these problems must and will be found at European level. This government will remain intensely engaged in finding European solutions to the ongoing financial and banking crisis in Europe. So far a limited menu of solutions has been tried but other options are being openly and actively discussed.
As is typical in a small open economy, the recovery is being led by Exports. Last year exports were up over 9% – the strongest rate of growth in a decade – and appear to have continued this impressive trend at the start of 2011. The export performance is broad-based nature and the change of focus is away from the traditional UK market. An important consequence of this strong export performance is that the current account of the balance of payments – essentially our trade and income balance with the rest of the world – has now moved back into surplus and is forecast to strengthen in the coming years. This means that Ireland as a whole is, and will continue to, pay its way in the world.
The impressive export performance has been underpinned by significant improvements in our competitiveness position, reversing the sharp losses we experienced earlier in the decade. We still have 1.8million people at work in the economy, 800,000 more then was the case over a decade ago. Small open economies that go down quickly can also turn the corner quickly if the right policies are applied.
Government Policies
Turning to the policies that the Government is putting in place to support the economic recovery, I would like to focus on three key areas:
· The labour market;
· The banking sector;
· The public finances.
Jobs initiative
Starting with the labour market, while the economy is expected to expand this year, recovery in employment typically lags that in activity more generally, and as a result further net employment losses are forecast for 2011 as a whole. The number of jobs lost will be significantly lower than in previous years, however, and from next year the economy is expected to start creating jobs once again. The Government recognises the challenges faced in getting the country back to work and is making job creation a priority. Accordingly, labour market developments in the coming years will be supported by the Government’s jobs initiative, details of which will be set out in the Dáil next week. The approach – in broad terms – will involve a combination of boosting labour market flexibility and improving competitiveness. For instance, it is intended to amend sectoral labour market agreements while, at the same time, reversing the reduction in the minimum wage. In addition, the Government will reduce the lower VAT rate in a fiscally neutral manner.
These measures will re-focus our resources to where they are most beneficial and therefore help underpin confidence. People have never saved as much as they are saving. They are afraid to spend because of employment worries. Boosting the domestic economy by encouraging domestic demand is central to our approach. Without that, there can be no real recovery.
Supporting the banking sector
In relation to banking, the Government welcome the recent stress testing carried out on behalf of the central bank. These exercises were characterised by a high degree of transparency and the input of highly respected international consultants, and as a result have been well received by the market. The analysis suggests that a further capital injection of €24 billion is required. While the Government will act to reduce the cost to the State, there is no doubt that the implications for the taxpayer are substantial. The measures will, however, ensure our domestic banks are capitalised to a very high level and will address market scepticism regarding their financial position as the figure is sufficient to absorb shocks of exceptionally high levels to the banking system over three years. Accordingly, as losses emerge over the next few years, capital levels will remain high by international standards even under a distressed, highly improbable, economic scenario.
The recapitalisation will occur alongside a radical reorganisation of the banking sector in Ireland. Banks are to be required to unwind €77 billion or so of non-core assets, so that they can re-focus on their core business of lending to support real economic activity in Ireland. This reorganisation will also involve significant consolidation within the sector – we will ultimately have two pillar banks, with the interests of competition served through the participation of foreign banks in the Irish market. The approach creates the capacity for the Pillar Banks to lend in excess of €30 billion into the Irish economy over the next three years, providing a sound foundation for recovery.
These exercises will deliver a smaller, more robust banking system capable of supporting economic recovery. Crucially, following the announcements there is now a growing consensus that we have reached the bottom of the bottom of the banking crisis.
Public finances
A third area of policy focus for the Government is the public finances.
In relation to the deficit, the situation appears to have stabilised, with data for the first quarter of the year broadly in line with expectations. Notwithstanding this, it is clear that a large and unsustainable deficit remains; the General government balance is now forecast to be 10 per cent of GDP this year. Most of this appears to be structural rather than cyclical, and as a result we cannot rely on a pick up in the economic cycle to bring it back to a sustainable level. In other words, further budgetary consolidation measures will be required to bring the State’s spending and revenues to more closely aligned levels in the coming years.
It is abundantly clear that robust action on the public expenditure front is necessary in order to ensure that consolidation targets are achieved. In this regard, the Government has initiated a Comprehensive Review of Public Spending, which will form the basis for deficit reduction in the coming years. The challenge of the Review lies in examining not only how we can spend less, but also how we can do more; in other words, it is about boosting productivity. The Review also involves asking the question of how we can achieve our policy objectives differently; how we can be more effective and efficient. The objective of the process will be to provide the Government with a comprehensive set of options.
Bridging the gap will also come through growing the economy. And let me refer to growth and be positive about it. Gloomy economic forecasts are not set in stone. Sometime economic and media commentators aren’t looking for green shoots; they are looking for dead grass. Indeed one of most high profile economic commentators writing in the Irish Times just a couple of weeks ago made the following point and I quote "Economics is powerless to predict the future. Any random number picked from the air is better than an economic prediction".
So where is the positive thinking? Despite all that has happened Ireland is still good place to do business. In its recent report for 2011 the World Bank ranked Ireland first in the Eurozone for doing business and the Wall St. Journal and the Heritage Foundation together have also ranked Ireland first in Europe for economic freedom.
Our tourist sector has the potential to return to significant growth. There is now excellent value and infrastructure in place to support a strong recovery in the tourist sector. I also believe agriculture and food will be a strong growth area in the years ahead. Agriculture and food will play a play a big role in Ireland’s future prosperity. The Agri Food industry is one of the main drivers behind our export success. During the Celtic Tiger years agriculture and food were not seen as very glamorous. The wheel has turned. A long-term investment and development strategy for agriculture will reap big rewards in the years to come.
As a former party spokesman on education I am also very aware of the potential for positive growth in the provision of international educational services. I know that Ruairi Quinn has big ambitions in this area and the future looks bright.
The energy sector continues to be a fast moving dynamic sector of the economy. Full competition has been restored to the electricity market. Major investment to the grid and smart metering is planned and the renewable sector, from a small base is now becoming an important player. There is of course a very uncertain political situation in the Middle East and this poses risks to our energy supplies. In addition to this the chief economist with the International Energy Agency has recently come to the view that oil production peaked in 2006 and that further significant price increases are on the way. I believe there is an urgent national priority to reduce our vulnerability to energy external supply shocks. The ESRI were right to draw attention to this important issue in their recent report.
And perhaps I should also refer to that Irish love that no longer dares speak its name. I refer of course to the Irish love affair with property.
Let me say the government sees the property market as an important segment of the economy. We do want to see a well functioning commercial and residential property market based on realistic values and sustainable practices. And despite the excesses and hubris of some developers we don’t see them as social pariahs suffering from some horrible disease. Indeed a little mojo from some developers might be welcome. True and full information is essential to any properly functioning market and the government is committed to making such information available in the property area.
Above all the recent crisis revealed deep weaknesses in our society. The recent Nyberg report Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Report of the Commission of Investigation into the Banking Sector in Ireland, provides a very important insight into recent events here. It is clear that there were failures in banking, in regulation, in the authorities, and in professional standards. These are all clearly set out in the report published by the Commission of Investigation.
One important issue the report deals with is relevant for the audience before me today. I refer to the role of external auditors and in particular their role in commenting in their audit reports or other communications to the institutions concerned on standards and controls in the context of corporate governance and prudent risk management policy and procedures or the business models and strategies and business and lending practices of the covered institutions.
In brief the main findings were: auditors’ commentary regularly focused only on issues which they considered related to the accuracy of the historic accounts, auditors clearly fulfilled this narrow function according to existing rules and regulations, in the absence of an express requirement for the auditors to do so, there appears to have been no challenging dialogue with the covered banks on their business models and their growing property and funding exposures. Such dialogue could have highlighted the business model risks and might have influenced the banks in relation to their growing vulnerabilities as the Period progressed, and
Mr. Nyberg found it unfortunate that sufficient, timely and challenging auditor dialogue was not used to influence the banks’ business models and lending practices.
These findings raise a number of issues for the audit profession concerning how it sees its own role and its relationship to both client firms and to external statutory and other stakeholders.
It is clear however that the Commission of Investigation generally accords with the view that the audit profession should be able to contemplate an enhanced role in co-operation with supervisory authorities, while recognising their respective statutory functions. This is a view which I generally support and indeed I understand that the Central Bank has commenced a process of engagement with the audit profession to explore the potential for enhanced, regular dialogue between auditors and supervisors and how the profession can best assist the Bank in carrying out its supervisory functions.
I welcome the fact that the Institute itself is actively engaged in this debate and is undertaking an industry-level review of the role of statutory audit which is considering issues such as the scope of the audit; how the audit profession interacts with and reports to shareholders and the information included in such reports; relationships between auditors and supervisors; and how the profession is regulated.
Furthermore I understand the CARB Board expects to publish a report this summer on the current review of the 2008 audits by members in the covered institutions.
I look forward to the outcome of these reviews as they will add and inform debate on the role of auditors. But more importantly I look forward to the recommendations coming from these reviews which will enhance the role of auditors as set out in the Nyberg report and show that we can learn from these events and put in place robust structures and procedures so that they don’t happen again.
There were also weaknesses in above all in politics. The former White Chief of Staff, now mayor of Chicago, Rahm Emmanuel in late 2008 when the US was dealing with their financial difficulties said, "you never want to waste the opportunity of a good crisis". This government is not going to do so. We are embarked on major reform of the public sector and we will also be pursuing a major programme of political reform in the months and years ahead. I also believe our business and professional need to consider reform and renewal. Anyone following the stories from the Commercial Court during the past years will have cause to be worried by the decline in professional standards exposed by some cases. Part of Ireland’s national recovery will involve a determination by each and every one of us to conduct our affairs to the highest standards of professional and personal integrity.
We are citizens of a Republic, of a European Union and of one world. Our future is not set in stone. It is there to be created. Our past successes and failures will certainly influence that future but they will never determine them. In the words of President Obama "the future is there to be won". My job and the job of my colleagues in government is to win that future for Ireland and for its people and get us to that better place.