(06 Jan 2010)
Are you confident that Europe will recover in lasting way this year and that Ireland will recover?
Yes I am. I would not base this on only a few indicators....Indicators move up and down and you have to go deep into the trends and we have seen since the last part of 2009 that first of all figures are now in the black and second that there is a trend of moderate growth that we expect to be maintained - with some uneven behaviour probably and big uncertainty remaining. But I think we have now turned an “inflection point” and are heading in a different direction. As regards Ireland the crucial thing is to take the right measures and to implement them. In that respect I’m pretty sure that sooner rather than later you’ll start to see positive figures on a sustained basis.
Jean –Claude Trichet said Ireland needs to remain “alert” to economic events. What did he mean by that?
But the President said also that Ireland has been very courageous in the measures it has taken. At the same time it must remain alert because having taken the right decisions, you have to implement them. This applies to first of all fiscal consolidation which started at the end of 2008 and has progressed so far. But a lot remains to be done to reduce the structural deficit by 2 per cent of GDP per year to achieve by 2014 a total deficit below 3 per cent. On addressing banking sector weaknesses a lot is underway. In the coming weeks the expectations would be that the Commission would issue its judgement on NAMA so that bank balance sheets could be cleansed and derisked and to that extent they would feel in a strong capital position – and this is the expectation – to be able to extend loans. The third avenue is about restoring competitiveness. A lot of competitiveness was lost. In ten years 15 per cent unit labour cost increase above the average of the Union and this means gains have to be made. Some measures have been taken by containing wages and prices.
Over the coming year the ECB will be taking away the so-called “quantitative easing” measures – loans given to banks by the ECB with looser than usual requirements for collateral. How fast will this “exit strategy” happen and could it derail Europe’s recovery? Could it derail Ireland’s recovery by affecting NAMA ?
There is no pre-committed time line for the phasing out. We will take into account – at all points in time – the situation and the fragility of the markets in particular - in order to continue progress in that respect. This means we don’t aim at producing any pain. On the contrary. What we try to do is to withdraw measures alongside the recovery of the markets.....The key is bringing back confidence and confidence is brought back by doing the right thing in macro policy, banking reform and restoring competitiveness. So I’m positive on the possibilities of those countries that are doing the right things in these three areas.
What do you think of NAMA? And given that it depends on banks being able to borrow money from teh ECB using Irish government bonds will they still be able to do this after the ECB removes the current easy lending regime?
By and large I would say NAMA provides what is needed to cleanse the balance sheets of banks, to derisk the balance sheets of banks and to have a clear view on what are their capital needs. Will the exit strategy affect their ability to do so? I don’t think so. I would also emphasise that these bonds should be usable in the private repo market – not only in the windows of the ECB. And to the extent that these bonds have the full guarantee of the Irish government, they should be usable in the private market.
Are backward looking banking inquiries really helpful and what you expect a banking inquiry on what went wrong in Ireland to identify?
I think inquiries are always useful if they help to know better the causes and to inspire new regulations and new behaviour. I understand that if properly conducted these inquiries should help.
Your fellow Spaniard and EU Commissioner Jose Almunia said recently that Ireland had permanently lost competitiveness because of the euro. Do you agree and if so why do you think that loss has been permanent?
No, I interpret the words “permanent loss of competitiveness” as meaning that competitiveness has been lost over a long period and not that competitiveness cannot be restored. As I said before the unit labour cost disadvantage has increased continuously since the inception of the euro but this might not be totally surprising given that Ireland was in a super competitive position before the introduction of the Euro. But it is a fact that something has to be done to restore competitiveness to engineer an export led recovery. I think the basic measures in that respect have been taken.
I understand that the ECB doesn’t want euro zone countries in trouble to get assistance by way of borrowing from the IMF. Does this mean other euro zone countries should help them – with loans for example – or should we establish a Euro-version of the IMF?
The expectation of the ECB is that the Greek authorities would do whatever is needed - including additional measures- in order to stick to the commitment of the Greek authorities to reduce the deficit by 4 per cent this year and by the necessary amount to be below 3 per cent by 2012. This is the commitment of the Greek authorities. We back that commitments. They can do this alone absolutely with the backing of the Eurogroup and European Union. Don’t forget that the euro is construct where help is provided ex-ante to the extent that you behave according to the rules of the Stability and Growth Pact, to the extent that monetary policy preserves price stability and to the extent that structural reforms are delivered.
But unlike Ireland Greece has not yet shown the resolve necessary to rectify its fiscal crisis. Also unlike Ireland it has a serious balance of payments problem. Is it not time to envisage and deal with the fact that one or two members of the euro zone might not be fit to remain members?
We believe all the members of the euro zone are fit to be members but different countries have to take different measures to take into account the specifics of their situation. One particular specific in the case of Greece is the reliability of statistics. I think this is a pretty grave issue that is being addressed at the moment. Because had we had the true statistics in front of us some years ago, many of those problems would have been dealt with earlier.
Jean Claude Trichet said that Greece’s Balance of Payments problem doesn’t matter for the euro zone and compared it with California. But California is part of a federal fiscal system called the United States. If Greeces’ external balances don’t matter then in order for for that to be true we need much stronger system fiscal co-ordination between euro member states than we have now?
We need strong fiscal co-ordination, no doubt and probably this crisis is teaching us that we have to improve upon the degree of co-ordination and peer pressure that is functioning at the level of the union and in particular at teh level of the euro zone. You are right. The only way to do the trick and to maintain the assertion that external imbalances do not matter is that fiscal policies are strongly co-ordinated and are sustainable. But this is the responsibility of national governments helped by peer pressure.
You say that this depends on fiscal co-ordination, but aren’t financial markets telling us that the Stability and Growth Pact is too weak?
No I don’t agree. I think that fiscal sovereignty remains with nations and this means that governments ahve to do what it takes to fulfil the obligations of co-ordination and sustainability. Don’t forget there are other shock absorbers at the level of the union, for instance financial market integration.