"Ireland and the European Union--Shared Determination, Shared Destiny" By Christine Lagarde, Managing Director, International Monetary Fund
March 8, 2013By Christine Lagarde
Managing Director, International Monetary Fund
Dublin Castle, Dublin, March 8, 2013
As prepared for delivery
Good morning. Dia daoibh a chairde! It is a great pleasure to be here—in this proud and remarkable country; in this beautiful, bustling city of culture; in these hallowed halls that have stood witness to the march of history over the course of centuries.
I would like to begin by thanking the Taoiseach, the Tánaiste, Ministers Noonan, Howlin, Burton, Fitzgerald, and Creighton; Governor Patrick Honohan; and all who helped organize and prepare for these events and meetings. And a special word of thanks to Minister Noonan for his kind words of introduction.
Let me also thank the Institute for International and European Affairs—especially Chairperson Brendan Halligan and Director General Dáithí O’Ceallaigh—for hosting us today. And let me recognize the ambassadors and the representatives from business, trade unions, civil society, and academia.
Ireland has always exceeded expectations in the world: in the arena of culture, in the laboratory of science and technology, on the field of sport—as the French might find out tomorrow! It has always been a country of great resilience and reinvention—and great humanity. Time and time again, in the face of overwhelming odds, it has bounced back, stronger and more confident than before.
This time is no different. As Taoiseach Enda Kenny put it, the Irish people have borne the burden of economic crisis with “remarkable courage and patience and quiet dignity.”
I believe this is testament to the enduring character of the Irish people, a character shaped by inner strength and determination, forged by time-honored bonds of trust and solidarity. A character that the great Irish writer Edna O’Brien once referred to as “ferociously tenacious.”
And so it is fitting that Ireland has assumed the European Union presidency at this moment in history. The presidency’s theme is “stability, growth, and jobs”. This is exactly the right focus. It is also what I want to talk about today.
Specifically, I believe that restoring “stability, growth, and jobs”—both in Ireland and across the European Union—calls for further shared determination toward a shared purpose. In this regard, let me talk about three issues:
1. The Irish dimension—what Ireland needs to do to restore “stability, growth, and jobs”.
2. The short-term European dimension—supporting the economic recovery.
3. The more medium-term European dimension—building a stronger Eurozone.
1. The Irish dimension
Let me begin with the Irish dimension. You are all too familiar with the rise and fall of the Irish economic miracle, and how the real “Celtic tiger” soon gave way to a fake “tiger’s ghost”—a bubble-driven bonanza of lax lending, mounting private debt, skyrocketing property prices, and eroding competiveness. It was excess with little oversight.
Ireland faced the hardest of landings. In just three years, real output fell by 8 percent. Employment has fallen by 15 percent since 2008. House prices have fallen in half. The banking system toppled over, leaving the taxpayer to carry the can, amounting to 40 percent of GDP. On top of collapsing revenue, this led public debt to rise by an astounding 100 percent of GDP in just five years.
Let me talk about the response to the crisis so far and what remains to be done.
Response to the crisis
The response to the crisis can be summed up in one word: tenacious. I think we can see this Irish determination in three key ways—a sense of ownership, a sense of realism, and a sense of solidarity.
Starting with sense of ownership: we could see from the outset that there was strong political will to implement the needed policies. The government—both this one and the last—took hold of the reins and never wavered in its commitment to get beyond the crisis.
And here, the role of the IMF was to help, to serve our members—and we are doing this alongside the European Union and the ECB. We work together to lay out the way forward, and we are happy to provide the petrol to start the engine, but the Irish government must stay in the driver’s seat.
So how do we help? We help with our policy advice, based on 70 years experience with 188 countries. We help with our financing—we will lend when others walk away, to lessen the hardship during times of trouble, to help build a bridge to better days.
This sense of ownership was coupled with a sense of realism—the Irish people knew that the past was unsustainable. They pulled together in the national interest, swallowed the bitter pill, and made the hard choices.
Just look at the accomplishments of the past few years.
The government began a root-and-branch reform of the banking system. The reform plan was based on three pillars—deleveraging, recapitalization, and reorganization. In other words: slim down and shed the fat, get fit with more equity, and behave responsibly in the service of the real economy.
Progress to date has been impressive. The size of the bloated banking sector has been reduced, and recapitalization is well advanced—with €24 billion in new funds injected into the banks to help them get back on their feet. And here, the burden on taxpayers was limited to €17 billion by mobilizing private investment and burden sharing with subordinated debt holders.
I should also point out that the rigor and transparency of the stress tests underpinning the recapitalization has served as a model for others.
The government also made huge strides on the budget. During the most difficult of times, it introduced deficit-reducing measures amounting to 12 percent of GDP, with a further 5 percent of GDP still to go over the next couple of years. This meant taking tough decisions on pay, social services, and taxes. Most recently, the government reached agreement with the public sector union leaders on savings worth a billion euros a year by 2015.
This brings me to the third aspect of Irish determination—a sense of solidarity. The government took these decisions while maintaining social cohesion, protecting key public services, and throwing a life-vest around the most vulnerable. Because of this, Ireland was able to avoid a large increase in poverty.
I believe this stems from the cherished Irish tradition of social partnership. President Michael D. Higgins put it best when he talked about “a people that grasps the deep meaning of the proverb ní neart go cur le chéile—our strength lies in our common weal—our social solidarity.”
What remains to be done
Let me shift to the future—what remains to be done.
As I said earlier, Ireland’s efforts are paying off. Growth has come back—we expect the economy to expand by 1 percent this year. And while this is still weak and little changed from the last two years, it is better than in most European Union countries. And crucially, Ireland returned to the bond market in 2012 and its access continues to improve this year.
So despite what Peig Sayers might say, the Irish economy does not have “one foot in the grave and the other foot on its edge!”
But while Ireland is seeing the first fruits of success, the harvest has yet to come. People are still swamped by debt—household debt is 208 percent of disposable income, and 15 percent of mortgages are in arrears. Public debt is about 120 percent of GDP. Banks are making losses and almost one in four loans has gone bad. And unemployment is still cripplingly high at more than 14 percent—and double this rate for young people.
So we see three key priorities ahead—working out private debt, delivering efficient and effective public services, and reducing unemployment.
On private debt: The key here is to work out distressed loans on a case-by-case basis, for both households and enterprises—to find a sustainable way forward for those who cannot afford to pay. It is especially important for viable small and medium-sized enterprises to get the funds they need to expand and hire—after all, this sector accounts for 72 percent of Irish employment.
Fundamentally, we need to bring banks and borrowers together to find durable solutions to the debt problem, and keep bankruptcy and repossession on the table as a last resort where there are no better options.
On the public sector: Ireland should strive to provide high-quality public services and meet its social justice obligations to all citizens. But given budgetary realities, it will need to focus on meeting core public needs, especially in the most important services like health, education, and social protection.
Through all of this, Ireland should strive to maintain social cohesion by sharing the burden fairly and protecting those in greatest need. This is one reason why we support the pending residential property tax, which is a progressive way of reducing the deficit.
On unemployment: As an urgent priority, the government must address the scourge of long-term unemployment. The scale tells all: 60 percent of the unemployed have been without a job for more than a year, and 30 percent for more than two years. This is a vital issue for economy—people without jobs for long periods tend to lose their skills.
So we need renewed efforts to help these people find jobs. Higher growth is obviously a precondition for jobs to come back. In the short term, accelerating the public-private investment projects—partly funded by the EIB—can help. We also need revitalized employment services, which focus on the right incentives and the right skills for the right jobs. Along with our European partners, we have encouraged the government to redeploy well-trained staff to this critical area.
We must always remember that both “stability” and “growth” are ultimately in the service of “jobs”—and people.
It is on these three points that Ireland’s fortunes will turn.
2. The short-term European dimension—supporting the recovery
Of course, the Irish economy does not operate in a vacuum—it is deeply embedded within the European Union, especially the Eurozone. So let me turn to that European dimension.
The Irish people have chosen to pitch their tent within Europe, which has served them well. They have chosen to align themselves with the broader European cause, with the great experiment in integration and coming together—putting common interests ahead of petty differences and striving to fulfill the grand vision, centuries in the making, of permanent peace and shared prosperity.
For Europe’s destiny is also Ireland’s destiny. The Taoiseach put it so eloquently when he said that “we dwell best and deepest in the shelter, never in the shadow, of the other.”
So let me talk about what is required at the European level to restore “stability, growth, and jobs” across the continent—which in turn will greatly help Ireland’s efforts.
Certainly, we have come a long way since last summer, and financial anxieties have eased to some extent. This is testament to the progress made by European policymakers on a variety of fronts—including the European Stability Mechanism, the ECB’s Outright Monetary Transactions, and the agreement to reduce Greece’s massive debt burden.
But this improving sentiment is not translating into higher jobs or incomes. It might be helping markets, but it is not yet helping people.
The underlying problem is depressingly familiar—lingering high debt of households, banks, corporations and government. As the different sectors struggle to shake off these millstones, growth is bound to suffer. And indeed, we expect a continued recession in the Eurozone this year.
In these circumstances, macroeconomic policy can help support demand. This is particularly important for Ireland, where the recovery is being driven by exports—which can only be sustained by adequate levels of demand in partner countries.
What does this mean in practice? It means that monetary policy should remain accommodative, and we believe that there is still some limited room for the ECB to cut rates further.
Going further, Outright Monetary Transactions can help monetary policy work better and sustain fiscal adjustment efforts by reducing financing costs in countries facing severe market constraints. We also think that when program countries are on the right track, they should receive support to help them regain market access and reduce dependence on official assistance.
Fiscal policy is trickier. With public debt so high, the direction must be down, not up. But the pace is everything. A measured and steady pace will generally strike the right balance between putting the books in order and supporting the recovery.
“Measured and steady” also means coming up with credible medium-term plans with durable measures and sticking to them—rather than focusing on headline deficit targets and fighting any fall in tax revenues or rise in spending due solely to slower growth.
I believe that the current fiscal framework in Europe has enough built-in flexibility to get the adjustment right.
When we talk about demand, we must understand that it is unbalanced across Europe—much stronger in the North than in the South. Much of this reflects relative competitiveness problems. Restoring a sense of balance means lower inflation and wage growth in the South, but it also might mean allowing somewhat higher inflation and wage growth in countries that can afford it. This too is an aspect of pan-European solidarity.
One more thing: we need to make sure that any spark to demand fuels sustained growth. This means reforms to boost the supply capacity of the economy. The IMF has done some interesting work here. We found that large-scale product market, labor and pension reforms across Europe could boost the level of output by 4½ percent over five years.
But, once again, cooperation is essential as a full quarter of the gains flow from the common effort of everybody moving together.
3. The medium-term European dimension—building a stronger Eurozone
On the subject of the medium term, let me now turn to my third topic—building a stronger Eurozone that can safely support its members in the years ahead.
In many ways, the European economic crisis was a crisis of incomplete integration. The Eurozone was a close-knit club, but not a solid community; it was linked by bonds of fraternity, but not family; it was a collection of well-functioning parts, but not a harmonious whole.
We had a single market and a single monetary policy, but dispersed supervision of banks and limited fiscal integration.
This is changing. The Eurozone is now walking the path of deeper integration. We now have a unique window to put national interests aside and push for the finish line.
This brings to mind something Nobel Laureate Seamus Heaney once said: “Once in a lifetime, the longed for tidal wave of justice can rise up, and hope and history rhyme…Believe that a further shore is reachable from here.”
That shore is certainly within reach today. I am thinking especially about banking union, and the agreement on a single supervisory mechanism to oversee the Eurozone’s banks.
With a fragmented system, the fortunes of banks are tied to sovereigns, and the fortunes of sovereigns are tied to banks. If one goes down, the other goes down too. Here in Ireland, you saw how failed banks overwhelmed the government, leading to a ruinous sovereign/ bank/ real economy death loop.
A functioning banking union severs this link and cements stability. It ends fragmentation and makes monetary union that will also have to include sustainable and strong fiscal union more effective. It works against the buildup of concentrated risks. It stops deposit flight. And it makes monetary policy work better.
It is an issue of solidarity. Banking union means that troubled banks become the responsibility of all, not just one. You see this in Ireland. Yes, Irish banks borrowed too much and were poorly supervised, but banks in Europe also lent them too much. It is two sides of the same coin, and we need co-responsibility—starting with common supervision.
So it is important to implement the single supervisory mechanism centered at the ECB. There must be clarity on its duties, powers, and accountability. And it must have the resources it needs to do its job.
But the single supervisor on its own is not enough. It needs a single resolution authority that can restructure or shut down problem banks in a timely manner at least cost—including by sharing the burden with the private sector. It needs a common safety net, such as a common deposit fund, to sustain confidence. And it needs common backstops to deal with systemic problems across borders.
If put in place, this package should be able to finally cut the poisoned chord between sovereigns and banks.
But while this makes the future safer, we still have to deal with the mess left behind by the crisis. Troubled banks that are not systemic can be handled at the national level. But what about systemic troubled banks, which might be too big for any one country to handle? Here, direct recapitalization by the European Stability Mechanism could play an important role. It would share the cost across the membership—with heavy lifting to be done, seventeen pairs of hands are better than one.
This has particular relevance for Ireland. Direct recapitalization of the viable Irish banks can lower public debt—by switching some debt owed to Europe with equity—and help insulate the government from further potential drain if the economic situation gets worse. This will also help the government and banks access markets on better terms.
I have talked about preventing and pooling financial risks. Ultimately, deeper integration will lead to a stronger, safer, and more successful economic and monetary union. And that is surely in all our interests.
Let me conclude. Ireland’s strength has always flowed from its openness to the world. From the earliest of days, this small nation has made its mark.
At a time when Europe fell into darkness, it was Irish monks like St. Columbanus who kept the flame of learning alive.
From the time of the Industrial Revolution, it was Irish ingenuity that help build the roads, railways, laboratories and skyscrapers in lands far from home.
And after a period of isolation, visionaries like T.K. Whitaker paved the way for a great reopening to the world, as Ireland forged a new destiny within a united Europe.
The Irish have always been visionaries. They have never been afraid to dream big. It was William Butler Yeats who said: “I have spread my dreams beneath your feet; tread softly because you tread on my dreams.”
Over the past few decades, the dream of a dynamic, prosperous, confident nation became reality. And today, despite grave setbacks, this dream is still very much alive.
But Yeats also said “in dreams begin responsibilities”. And those responsibilities are the co-responsibilities of Ireland and Europe. Shared determination toward a shared destiny.
Thank you—go raibh míle maith agaibh!