merrion street

Thursday 20th October 2011

Good morning.

 We are living in very difficult and very uncertain times.  You don’t need me to tell you that.  Short-comings in euro area economic governance, and in the institutional architecture during the first decade of monetary union, have come back to haunt us.  There is now a palpable atmosphere of genuine concern and nervousness right across the Eurozone and indeed throughout the European Union. 

I will come back to that but first I want to mention some of the grounds for optimism.   Over the past eighteen months or so, wide-ranging improvements

taken place in Europe.  Witness, for instance, the necessary governance framework that is (albeit rather belatedly) being put in place, or the financial support mechanisms that have been established.  Who would have envisaged such developments even two years ago?

There is also the case of Ireland, which in some respects provides a template for other so-called peripheral countries within the Eurozone

Before proceeding, however, let me stress that in Ireland’s case, policy mistakes over a prolonged period of time culminated in a loss of access to financial markets, and this is a source of considerable regret to all Irish citizens. 

But what I believe is generally accepted is that Ireland has responded in a transparent and determined manner to the challenges which have faced us.  What’s more, I believe that it is becoming increasingly clear that the policies that we in Ireland have pursued are now bearing fruit. This is perhaps

evident from the improvement in market sentiment towards Ireland in recent months.  So, in this sense, the case of Ireland demonstrates that countries experiencing difficulties need to address their own structural problems if they wish to eventually stand on their own two feet.

In my remarks this morning, I would like to share with you the recent Irish experience, highlighting the key policy initiatives that are helping to restore credibility and to put our economy back on the road to recovery.

Turning firstly to the macro-economic situation, the latest figures show that GDP increased by 1.6 per cent in the second quarter of this year.  This follows on from a relatively robust expansion in the first quarter – so the Irish economy is growing once again.

The external sector is leading the recovery, with exports of goods and services now well in excess of pre-crisis levels.  This demonstrates that the improvement in competitiveness, which has been evident in recent years, is standing to us.  This, I believe, demonstrates the inherent flexibility of the Irish economy – prices and costs in Ireland have fallen significantly, and further improvements are in the pipeline.  The strong export performance also means that our balance of payments with the rest of the world moved into surplus last year for the first time in over a decade. 

The lesson from this is clear: economic growth is possible even with tough consolidation measures, provided the exporting sector is sufficiently robust and competitive.

Moving onto the public finances where our deficit target for this year is on track.  There is clear evidence that real progress is being made in terms of putting our public finances on a more sustainable path.  So far, consolidation measures amounting to around 13 per cent of GDP have been implemented since mid-2008.  Around two-thirds of this has been on the expenditure side; the remaining one-third has been on the revenue side, and has mostly taken the form of base-broadening.  In other words, we are trying to keep marginal tax rates relatively low, in order to minimise the impact on the growth potential of the economy.  So our approach to consolidation is in line with best international practice.

For next year, the agreed target is for a further reduction in the deficit to no more than 8.6 per cent of GDP and we are committed to implementing the necessary level of consolidation to ensure that this is achieved, come what may.  We will shortly set out our medium-term fiscal consolidation path covering the period 2012 – 2015, in which we will also provide as much clarity as possible regarding future consolidation.  Again, this is in line with best practice as it creates a greater level of certainty for decision-making in the private sector.

There are also clear signs of progress in resolving the problems in the banking sector, with the measures taken to date helping to rebuild international investor confidence in the Irish banking sector.

In a nutshell, our approach is to create a leaner, more resilient banking system centered around two pillar banks whose primary focus is supporting economic recovery in Ireland.

 In terms of resilience, a €24 billion recapitalisation of the banking sector took place in the Spring of this year.  And with this additional injection, Irish banks are now very well capitalised and capable of withstanding very distressed scenarios.  Crucially, around one-third of this capital was sourced from the private sector, including through Liability Management Exercises with subordinated bondholders in the various banks, anticipated asset sales and the injection of private capital into one major bank.  We see the private capital injection as a clear vote of confidence in the Irish banking system and indeed in the future of the Irish economy.

Progress with regard to restructuring has been significant in recent months.  This has involved not only mergers – which are necessary to create the two pillar banks – but also progress on an improved governance framework at the banks.

At the same time, the programme of asset deleveraging in the banks is underway, with significant progress expected to be made this year, notwithstanding the difficult environment in international financial markets.  In this context, I think it is important to stress that more than 80 per cent of the assets to be disposed of the Irish banking system by end-2013 are located outside of Ireland.

All of this reform of the banking sector is being overseen by a beefed-up banking unit within the Ministry for Finance, established since the new Government came into office.

It is also true to say that Ireland has built up a significant credibility premium.  Our fiscal consolidation began as soon as difficulties began to emerge, long before the Troika arrived in Dublin – and I give due credit to the previous Minister for Finance, Brian Lenihan, in this regard. 

Moreover, as we approach the first ‘anniversary’ of the external assistance programme, it is worth pointing out that successive quarterly reviews have concluded that programme implementation in Ireland is strong.  Ireland is delivering and this has not gone un-noticed in financial markets.  At lunchtime today my colleagues in the Finance  & Public Sector Reform Ministries – Ministers Michael Noonan and Brendan Howlin will once again confirm that the most recent Troika review has been extremely positive and the Irish implementation of the programme remains on track.

In addition to our implementation of the IMF/EU programme, the cost of external financial assistance is also moving in the right direction.  As you know, last July  the Heads of State or Government in the euro area agreed that the cost of the EFSF facility to beneficiary countries should be close to funding costs.  Agreement has also been reached to reduce the margin on the EFSM facility, while the rate on the bilateral loans is also being reduced.  In addition, changes are being implemented to both the EFSF and EFSM to allow for longer loan maturities, which will be beneficial from a cash-flow perspective. 

All of these developments are having a positive impact; both directly – through lowering the cost of external financial assistance – and indirectly – by helping reassure markets that Ireland remains on a sustainable path.

Yields on Irish government paper have fallen significantly in recent months after peaking during the summer.  The message from this is unambiguous – clear, comprehensive, timely and credible polices that are consistently implemented will have positive dividends.

 We fully recognise, however, that we are not out of the woods yet.  Our deficit remains very high and further consolidation is necessary.  This means further tough measures and difficult decisions for our people, but there is a firm commitment to do what is needed.

So there are substantial challenges ahead, and as we all know market sentiment can change very rapidly.  But I think everybody here this morning would agree that Ireland is making good progress and that we are on the right path.

The Irish Government wishes to see a strong and decisive outcome from the European Council this weekend.  In order to achieve medium term stability and to restore certainty and confidence in the Eurozone, we support decisive action to ensure that a sustainable solution is found for Greece.  We wish to see a strong demonstration of solidarity with Greece, including agreement on a package which ensures delivery of the next tranche of funding to Greece. 

 We want to see the EFSF utilised in the most flexible way possible to raise its capacity and ensure fairness including safeguarding the other programme countries and vulnerable economies within the Eurozone.  We wish to see a credible strategy for recapitalisation of European banks, which are bending under the weight of solvency doubts.  And we want to see renewed commitment to the swift implementation of the economic governance measures which have already been agreed between the member states. 

Amidst all of this discussion of bond yields and market confidence, I would like to see European Member States and especially European Leaders invoking the sort of passion, commitment and sense of solidarity that engendered this great political project some 60 years ago.  It is perhaps worth noting that today, October 20

, marks the 66

anniversary of the opening of the Nurenburg trials.   Europe has come a long way since tens of millions of people were needlessly slain on this continent in two world wars.  Most of our citizens have no recollection of the devastation and destruction caused by war on this continent, and the impetus that it gave to the European economic and political project.  That does not, however, mean that we can afford to abandon that impetus or weaken our resolve to find common solutions to the common challenges we face. 

 We are lucky today that we have a peaceful continent.

 We are lucky that we have a secure continent.

We are lucky that we have a prosperous continent.

This peace, security and prosperity did not happen by accident – it is the product of painstaking cooperation, of trust, solidarity and sacrifice.  These are values which should drive and shape our actions today every bit as much as they did 60 years ago when the European project was first conceived.  I hope that when our Leaders meet to find a lasting solution to the Euro crisis on Sunday, they will have these values at the core of their deliberations.  Co-operation, trust, solidarity and sacrifice are needed today, just as they were needed in constructing the new Europe from the ashes of World War II – even more so!  Our Leaders cannot afford to forget that at this pivotal moment in our history.

 Thank you for your attention.