IntroductionLadies and gentlemen, at the outset let me say that I am delighted to be here today to speak at the American Chamber’s annual Thanksgiving Lunch.
I note that this year marks the fiftieth anniversary of the Chamber’s establishment in Ireland and I want to congratulate all concerned on nourishing and developing the economic and business links between our two nations over the past fifty years.
The success of these links is visible to all:
Ø the US is the single largest source of Foreign Direct Investment to Ireland;
Ø approximately 600 companies employ 100,000 people directly;
Ø a strong presence in sectors as diverse as Financial Services, Technology, Digital Media, Consumer and Business Services and Life Sciences;
Ø US companies account for €93 billion of exports;
Ø these companies account for €1.8 billion of corporation tax annually.
In turn, US companies benefit from the availability of a skilled, English-speaking workforce, a flexible labour market, access to the European Single Market, and a can-do attitude. So we have a mutually-beneficial relationship and the Chamber provides an invaluable forum to share ideas and exchange information, allowing us to work towards our common goals.
In fact, I note with interest that the Chamber’s recent report – Built to Last – highlighted just how deep the commercial links between Ireland and the United States have become. It shows that US firms have invested more capital in Ireland since 1990 than they have in Brazil, Russia, India and China combined. In addition, the report shows that over the past decade, Ireland’s share of US investment in Europe has risen from just over 5 per cent to nearly 9 per cent – so our relationship is getting stronger! This is confirmed by recent strong inflows of Foreign Direct Investment to Ireland from US firms which includes:
Ø Twitter, the social networking giant, announcing the establishment of its first Irish operation;
Ø Coca Cola’s opening of a new $300 million manufacturing and innovation facility in Wexford;
Ø Google investing over $100 million in a new data centre – following on from its $140 million investment in a new European Headquarters in Dublin earlier this year
Ø Merck investing over $530m in four of its Irish sites.
These figures emphasise the vital importance of Ireland’s relationship with the US, and I want to assure you that the Irish Government is committed to strengthening this relationship for the benefit of both of our countries.
But, of course, friendship is more important than economics and I believe the friendship between our two countries today is stronger than it has ever been. This is perhaps most evident from the hugely successful visit of President Obama to our shores last May, which I believe clearly demonstrated the high esteem in which both nations hold each other. I want to assure you that the President’s visit has had a lasting positive impact on restoring national morale.
Irish Economic Developments
As everybody in this room will be aware, this time last year Ireland was effectively locked out of sovereign bond markets and we had no choice but to seek international assistance. But since this low-point, clear – albeit gradual – progress has been made, and in my remarks today, I would like to share with you my thoughts on this progress.
Turning firstly to the economic situation where the latest data provide grounds for some cautious optimism. The figures show that the level of activity increased at a relatively strong pace in the opening half of this year, driven by a strong performance in the exporting sectors. US-owned firms have, of course, played their part in this, and I want to acknowledge this. But Irish-owned firms have also played their part, seeking out new markets abroad in response to weak demand at home. The Agri-food business has been performing especially well and there has been a marked improvement in the tourism sector after the Jobs Initiative. So the competitiveness improvements that have been evident in recent years are paying off and this demonstrates one of the fundamental strengths of the Irish economy, namely its flexibility and its adaptability.
Unfortunately, however, the nature of export-led growth is that the spill-over effects – in terms of employment for instance – are relatively less pronounced. So for many people, it does not feel like the economy is growing at all, and I am acutely conscious of this. But, given the scale of the imbalances in the domestic economy, it is clear that the exporting sectors will be the significant source of growth for the next few years.
Earlier this month we published our Medium Term Fiscal Statement outlining how we see the economy evolving between now and 2015. In a nutshell, what we expect is a gradual firming of activity, with the external sector being the engine of the recovery. This general outlook is broadly shared by others.
Of course, we are very conscious of the risks to the outlook, especially in the near-term, and it will not surprise you to hear me say that I believe that the biggest risk comes from wider euro area developments. The situation is undoubtedly very difficult and people are rightly concerned about the future. While sometimes overlooked, I think it is fair to say that a lot of progress has already been made – the establishment of the financial support mechanisms is just one example of something that would have been unthinkable only a few years ago.
The comprehensive strategy announced by euro area Heads of State or Government at end-October was designed to address the problem. Having said that, it is clear that we in Europe remain behind the curve and more needs to be done.
An improved governance structure will be a key part of this, and yesterday the European Commission published draft legislation aimed at improving its surveillance of policies in Member States. From our point of view, we see increased surveillance as inevitable – we simply cannot have a single monetary policy with divergent economic and fiscal policies. The lesson from the crisis is simple: these cannot co-exist. However, it is important that appropriate checks and balances are preserved. It is also important to point out that surveillance is about overall budgetary policy that is that deficits and debt are sufficiently controlled. It is not about harmonisation of tax rates.
Fiscal Developments
Turning now to fiscal developments, and as has been well documented, the collapse of the property bubble exposed something of a black-hole in our public finances. But policy has responded rapidly and appropriately to address this problem, with consolidation measures of around 13 per cent of GDP implemented since mid-2008. The latest figures show that our efforts are beginning to pay off – we have succeeded in stabilising the deficit.
We are very conscious, however, that the deficit remains too high and I want to assure you that the Irish Government is fully committed to addressing this. Through a combination of economic recovery and further fiscal consolidation our medium term strategy is to bring the deficit below 3 per cent by the mid-part of this decade. I believe that this medium term approach strikes an appropriate balance between the need for consolidation and the need to nurture the emerging economic recovery.
You don’t have to be an economist to appreciate that the composition of fiscal adjustment is almost as important as the scale of fiscal adjustment. Roughly two-thirds of the adjustments to date have been on the expenditure side of the balance sheet and, broadly speaking, this pattern will be replicated in future years. But while taxation measures will be required, I want to assure you that the Government is resolutely committed to maintaining our corporate tax regime. The 12.5% Corporation Tax is not for changing – it is a key part of our growth strategy.
One other issue that I would like to highlight is the reform of the institutional arrangements for setting fiscal policy, which is designed to ensure fiscal discipline over the economic and political cycle. A fully independent Fiscal Advisory Council has been established, while the introduction of fiscal rules and a medium-term expenditure framework early next year will further enhance the fiscal framework. The Fiscal Advisory Council will be put on a statutory basis next year. The message I want to convey is this: we are learning from best practices and we are putting in place the mechanisms to ensure that a fiscal crisis of this scale will be not repeated.
Bank restructuring
As you all know, the collapse of our banking system has been at the heart of Ireland’s difficulties. But again I am optimistic that we are making progress. In essence what we are doing is establishing a stable banking system, capable of providing credit to the real economy in a sustainable manner.
First of all, we have created two universal ‘pillar banks’ – AIB and Bank of Ireland – through various mergers. Secondly, following detailed analysis undertaken by the Central Bank in March 2011, the €24 billion recapitalisation of these banks was largely completed at end-July, putting them in a strong core Tier 1 capital position, as confirmed by the recent European stress tests and sovereign analysis. Crucially, I am very encouraged by the fact that the net investment from the State in this recapitalisation was one-third lower than had been expected, reflecting private investment in Bank of Ireland, burden sharing with subordinated bondholders – the final LME exercise was announced yesterday – and asset disposals. I particularly see this private capital injection as a significant vote of confidence in the Irish banking system and indeed in the future of the Irish economy.
Thirdly, the process of ‘right-sizing’ the banks is well underway, with asset disposals having already been announced and further progress expected to be made this year, notwithstanding an international environment that has become increasingly difficult. I would stress that more than four-fifths of the assets to be disposed of by the end of 2013 are located outside Ireland, thereby limiting the impact on the domestic market. By 2013 the loan-to-deposit ratio in Irish banks will be reduced to 122.5 per cent from a peak of 210 per cent in 2007. The recent announcements by the Irish banks of wholesale funding transactions are to be welcomed and demonstrate the determination to achieve stable funding.
Taxation issues
Before concluding I would like to briefly mention the international taxation system, a key issue for all here today. We continue to be alert to potential changes in the wider system – including in the US – that could impact upon businesses with a base in Ireland. As you know, there is clearly a very active debate currently underway in the US on deficit reduction, broad tax reform and corporate and international tax reform specifically. My Department works very closely with our Embassy in Washington and the IDA in ensuring our perspective is factored in to that discussion in the Administration and Congress, and in monitoring proposals as they emerge. We are working all the time to support the reputation of Ireland as a base for substantial investment into Europe and the wider region – investment that plays an important role in the global success of major US companies and that ultimately supports jobs in the US as well as here in Ireland and elsewhere.
I think we have a very good dialogue with institutions like yourselves, who have the best knowledge on how such changes will affect how you do business. We want very much for that to continue. I would invite you always to be in touch with us on any concerns that come up in this context.
Conclusion
Ladies and gentlemen, in my comments today I have tried to give you a flavour of what I see as the key developments in both Ireland and the euro area. The reputation of both has undoubtedly suffered in recent times.
Ireland’s reputation is recovering, through hard work, sacrifice and perseverance. I have no doubt that the reputation of the euro area will recover also.
Thank you.