Remarks by the Tánaiste to EU Heads of Mission18 April 2011
Your Excellencies, ladies and gentlemen, colleagues,
You are all very welcome to Iveagh House and I am glad to meet you here in my capacity as Minister for Foreign Affairs and Trade and as Tánaiste. I know that you and your staff are all in regular contact with my Department and others across Government and that you cultivate a diverse range of contacts more widely in our society. That kind of exchange is a crucial function of diplomacy – I cannot over-emphasise the importance of comprehensive and timely information being available to the decision-makers in the 27 in these times of challenge and decision.
My purpose today is to reinforce that process of exchange of information and to convey to you a message from the heart of the new Irish Government. I also do it out of a strong sense of the interdependence and mutual solidarity that characterises the European Union at its best – the term “partners” used to describe fellow Member States has real significance. And the difficulties that afflict us, while they have certain Irish specificities, are framed within a wider European crisis. Success for Ireland in overcoming them is a matter of mutual interest.
This new Government has been confronted in its early days in office with a tough and fast moving agenda, with a legacy of a dire economic and financial situation, and with the standing which it formerly enjoyed in Europe shaken and quite frankly damaged – the shine taken off it, as Catherine Day put it more diplomatically.
We have set to work immediately on proactively engaging with this inter-related compendium of challenges. The programme, as set out in the Government for National Recovery document provides the overall framework. It makes an explicit commitment to restoring Ireland’s standing as a respected and influential member of the European Union. This is a task to be pursued in a variety of ways and across Government and the administration. It will take time. We mean to reengage with the agenda and seek to make the sort of constructive inputs to debate and policy making that have been part of the Irish contribution in the past. My colleagues in Government and myself will be building up our contacts with members of your governments and with the key players in the EU institutions. That is an essential element in coping with the present situation and making sure we get a fair hearing; it is also relevant to the coming tasks we have in the contexts of the OSCE and of the 2013 Council Presidency.
We came into Government as the EU and Eurozone were grappling with the challenge of preserving the stability of the currency, stepping up the level of economic governance that necessarily accompanies a shared currency and, through structural reforms, putting Europe on a path that would ensure its share in world economic growth and thus in the creation of employment. In this connection the Taoiseach, only days in office, attended the Eurogroup and European Council meetings on 11 March and then on 24-25 March. Those meetings represented the culmination of work over quite a number of months and in different sectors and have produced a comprehensive package whose weight and significance will I think be proven over time.
I will not go into the detail of its component parts here – the Taoiseach reported to the Dáil on 13 April on the Spring European Council - but its credibility and effectiveness will depend in large measure on the manner of implementation. Ireland took a constructive part in the deliberations on governance, on the Euro Plus Pact, on the ESM and Treaty change. I want to assure you that that will be our approach now to implementation, whether through steps here to give effect to the European Semester in the presentation shortly of both the Stability and National Reform Programmes. or in institutional fiscal reforms such as Fiscal Responsibility Bill and a Fiscal Advisory Council as announced last Friday.
Irish developments in EU context
In the case of Ireland this general EU framework which I’ve described is supplemented by the particular characteristics of the EU/IMF programme. The ECB/Commission/IMF team completed their work last Friday on a review of progress in implementing the package. There was an extensive and detailed interaction with the team over a 2 week period and I am pleased to note the assessment that targets have been met –the fiscal ones with a comfortable margin, that the Programme is on track, and the evaluation of the Government’s approach to implementation as “determined”. The revised Programme, to be signed off and available by 15/16 May, will incorporate measures the Government has sought in relation to the Jobs Initiative, the minimum wage and the comprehensive spending review.
Those of you who have lived here over the past two and a half years know what sacrifices have already been made by the Irish people in their determination to get to grips with the situation. Corrective measures totalling €14.6bn were implemented between 2008 and 2010. This is a huge adjustment by any standards, amounting to over 9% of GDP, and it was followed by the additional €6 bn. in cutbacks in the budget for this year. Taxes have gone up markedly for everyone; the tax net has been widened substantially; incomes have fallen, even those surviving on social welfare have seen their benefits reduced. Our people have borne this stoically, on the understanding that these measures will contribute towards the goal of restoring our economic health.
With its strong mandate the new Government has faced up quickly to the pressing need -which has been at the root of much of our problems - to fundamentally restructure our domestic banking sector and recapitalise the banks.
After the results of the rigorous stress tests we announced the measures the Irish Government would take and which will change the landscape in the banking sector with just two banks emerging as the twin pillars of the new system.
Although much of the focus has been on the large sums of money required to recapitalise the banks, many observers have overlooked the fact that the financial measures programme includes a carefully thought out plan which will deliver a smaller banking sector fit for the needs of the real economy.
Given the level of State involvement in the shareholdings of the new banks, the Government is well-placed to ensure that their core business will no longer be skewed in favour of the real estate sector and we will be rigorously monitoring their activities to ensure that credit is made available to small and medium enterprises.
At the same time, we have identified over €77 billion in non-core loans, the majority of which are located outside this jurisdiction, and we have put in place a three year timeframe for the orderly disposal and run-off of these assets. This de-leveraging will help reduce the system’s reliance on ECB and Central Bank funding and hasten the day when the Irish banks can return to the inter-bank market.
The reform of the banking sector is, therefore, key to our stated objective of getting the economy moving again and there have been positive reactions and comment, with Irish bond yields declining following the announcement. Our discussions with the troika covered banking in some depth and the statement recognises the major step towards restoring health to the system that the reforms of 31 March represent.
In the course of the discussions on bank restructuring a number of issues were explored, including in relation to burden-sharing by bondholders and in relation to provision of liquidity to the banking sector. I will come back to the burden-sharing matter.
On liquidity, it was helpful that the ECB confirmed immediately following our banking announcements that the substantial strengthening of our banks and the provision of a sound capital base, through the provision of further capital to the banking sector is a “prerequisite for continued access to Eurosystem refinancing”. The ECB went on to confirm that they will continue to provide liquidity to banks in Ireland, including if the ratings agencies further downgrade Irish debt. This is of huge significance to the stability of and confidence in our banking system.
We have further difficult work to do. The size of the fiscal adjustment planned for 2011-15 is very large. While some previous episodes of this type in EU member states can be found and examined, they occurred against a backdrop of faster growth and in the context of independent currencies. Just as the situation for the eurozone as a whole is unprecedented, so is that for Ireland.
We are dealing with factors that are variable and in respect of which assumptions have to be made about the most plausible outcome: the international environment, growth rates, the cost of borrowing for the government, and the carrying through of the planned fiscal adjustment.
The external analysis, from the Commission and others, is that it is feasible.
The Government shares that view, providing the necessary conditions and supports are in place. We have a workable route map. The outlook is for growth to resume in2011. Tough decisions have been taken on banking and the response has been good. Domestic savings are at a high level and in the right conditions may give some recovery in consumer spending. The Government will launch its jobs initiative in May. Or competitiveness has sharpened, including through a reduction in unit labour costs. Exports in 2010 were worth over €89bn, of which, I might add, 57% went to EU countries. We expect a balance of payments surplus for 2011.
These are factors are in favour of a satisfactory evolution and outcome; others are not within our control, and the overall situation is the result of a combination of forces, some of them variable. Less concrete and quantifiable than the growth rate, though in their way just as important, are factors of mood and confidence. Determination and leadership, and the resilience and adaptability which Irish people are known for, can bolster those areas. So also can a feeling of solidarity with EU partners and a supportive stance on the part of the institutions. As we continue to work through the Programme there will be points at which that understanding and assistance can come into play in helping to secure the desired outcome.
One of those is the interest rate on the EFSF loans to Ireland. The Eurogroup Summit on 11 March agreed the rates for EFSF loans should be reduced to better take into account debt sustainability of recipient countries. This just makes good sense and indeed I was glad to see that view carried in the IMF World Economic Outlook recently. That called not only for an urgent decision on adjusting the interest rate but also suggested some additional flexibility in the operation of the EFSF and ESM to deal more directly with the interdependence of national banking systems and sovereign risks. As agreed procedurally at the European Council on 24 March, my colleague the Minister for Finance is now carrying the work on the interest rate forward in contact with his counterparts and with a view to Finance Ministers being able to sign off on it fairly soon.
A link has been drawn by some between this decision and the willingness of the Irish Government to change its Corporate Tax regime. On this point, I am compelled to be entirely frank with you all when I confirm, without equivocation, that the rate of Corporate Tax charged in Ireland will not be changed. This is the firm position of the Government and of the Dáil, and it is replicated in public opinion. Why am I so emphatic on this point? To change our corporate tax rate would be wrong, for us and for the EU as a whole. Corporation Tax is inextricably linked to our prospects for growth – for the growth that will allow us pull ourselves out of the extremely difficult position we are in.
At the meeting of Eurozone HoSG on 11 March, the language in what is now the Euro Plus Pact relating to tax was hard fought. In that text Ireland, with partners, has agreed to pragmatic coordination of tax policies, and to commit to engage in structured discussions on tax policy issues, to ensure, inter alia, the exchange of best practice and the avoidance of harmful tax practices. We will live up to those commitments.
We now have the CCCTB proposal from the European Commission, we will examine it carefully and thoroughly and we look forward to engaging on it along with all Member States. We have done a considerable amount of preliminary work on this already and you will be aware of the study we commissioned and which informs our scepticism as to the benefits of the proposal. We look forward to setting out our view in the discussions. I have little doubt but that as this proposal is analysed we will begin to see more clearly the complexity and variety of the tax bases in our member states and the interaction between that and rates.
I have mentioned the banking stress tests and the actions taken on foot of them. You will be well aware from media and comment here of a strong public interest and view on the additional burden for the taxpayer that these steps entail. It is not surprising that burden-sharing of this load should become part of the debate. Subordinated bondholders have already taken significant losses [€10 billion] and the Minister for Finance last week foreshadowed significant additional burden-sharing to be imposed on subordinated bondholders.
With regard to senior bondholders, the decision which the Government has made on bondholder liability was also set out at the end of last month. It was made clear that the Government is not requiring contributions from the senior bondholders for the two main Irish banks, designed to function as pillars of the new system and as such to be able to attract investment. With regard to Anglo Irish Bank and INBS, they were not part of the recent stress tests but a further assessment of their capital requirements will take place in May and consideration will be given as to the means by which any further needs could be met.
There are other ways too in which the likelihood of seeing the Programme and its goals through to completion could be enhanced. The wider Eurozone and European situations continue to evolve. Expert analyses and opinions abound, and they tend in a variety of directions. That underlines again the unprecedented nature of the situation in which we all find ourselves and I think it is prudent in those circumstances to allow for a certain flexibility and willingness to adapt in our approach at European level. It is also no bad thing that the situation stimulates innovative thinking and ideas, including recently for instance from the Governor Honohan of the Central Bank. Some of these ideas may be examined and found wanting, others may merit deeper consideration.
There is one point of a more technical nature but with important implications that I would also like to mention. Many of you will already be aware in other contexts of the marked distinction between GNP and GDP in the Irish case. This reflects the structural element in our economy of the high level of FDI. In 2010 GNP was just over 80% of GDP in money terms. I will not go into all the implications of that here today (my officials will be happy to provide more detail) but I would ask your assistance in ensuring that your Capitals fully appreciate what that means when wishing to measure measuring relative living standards or the size of the Irish Government’s tax base.
Irish Economy – Jobs and Growth
When we entered office we committed ourselves to getting the economy moving, protecting jobs and fixing the banks.
Our primary objective, of course, remains job creation and the Government’s role is to create a macro-economic environment which boosts confidence and productivity. This will be the focus of our jobs initiative. We need to create a climate in which people have confidence to spend, confidence to hire and confidence to invest and the key to doing this lies in investing in innovation and improving competitiveness.
We have, of course, already made significant improvements in competitiveness. Consumer prices have fallen, wages have fallen – by an average of 14% in the public sector and by about 12% in the private sector – the labour market is stabilising and the industrial production index was up by over 18% last year.
Our record export performance is, perhaps, the best indicator of our improved competitiveness. If anyone doubts the flexibility of the Irish economy or the resilience of the Irish people they should remember this: last year, in the midst of all the economic turmoil we have witnessed, Ireland had the second highest trade surplus in the European Union, after Germany.
Our balance of payments will return to surplus this year and, although they differ on the detail, all of the main forecasters agree that the economy will return to growth in 2011.
The fundamentals of the real economy are strong. But don’t take my word for it; take Morgan Stanley’s.
Last week Morgan Stanley said that, if there is one economy in the euro area that could meet major challenges,
“it is probably the Irish economy, we think. We [Morgan Stanley] continue to believe that Ireland is fundamentally different from the other peripheral countries in that it is a fully de-regulated, fully liberalised, market economy. As a result, it should be able to adjust to the crisis more quickly. True, the challenges are somewhat bigger than elsewhere – notably in the banking sector. But Ireland is among the few euro area countries that have historically managed major turnarounds in fiscal policy (and the wider economy) and it is already showing signs of the smart cyclical upswing in the manufacturing sector.”
Patrick Honohan, the Governor of the Central Bank, reminded us last week that domestic efforts will be fundamental and, writing in the Financial Times, he argued that “if economic growth recovers as it did in the late 1980s when debt and deficit levels were as high, then delivering the needed multi-year fiscal adjustment will be well within the economy’s capacity. But,” he cautioned, “a weaker economic recovery could exacerbate what some in the market interpret as a debt overhang.”
The Governor is known as a man who measures every word carefully and he brought us all back to why you and I are here today when he concluded his article in his characteristically succinct fashion with these words:
“[T]he policy dialogue with the rest of Europe, all too often portrayed as a zero-sum game with each side seeking to secure concessions from the other, will be key to avoiding [the] trap [ofweak economic recovery]. Instead,” he said, “the focus should be increasingly on measures that can help unblock growth.”
Ladies and Gentlemen,
We are in a complex and unprecedented situation in Ireland, and that forms part of a bigger European picture. The measures we are taking and the assessments and estimates on which we work are a complicated mixture of the national and those in the EU/IMF framework. Ecofin, the eurogroup, the European Council and various other instances are the setting for our multilateral interaction. Bilateral contacts also play a vital role. In all of that it is important that our interlocutors know in advance as much as possible of our situation, our economic structure, and the mood and public opinion here which are the backdrop to the Government’s policies and actions.
Embassies, whether the Irish ones in your capitals or your offices here in Dublin, are channels for communication which can make a notable contribution to facilitating that work. We want to engage with you on the current economic issues, and more broadly across the range of issues which we cooperate on in the EU context. You will, I know, as part of your regular meetings in Dublin be seeing various members of the cabinet. It is our intention too- myself, the Taoiseach, the Minister for Finance and the Minister for European Affairs- to get out and meet as many Ministerial opposite numbers as possible over a period of time.
We want all of this to build up deeper understanding of the issues and the context, as well of course as the valuable personal contacts which are integral to doing business. It is our way of giving practical expression to the high priority that this Government puts on Ireland’s participation in the fullest way in the European Union. And to achieving a satisfactory resolution of Ireland’s difficulties as part of a eurozone and European Union stabilisation and recovery.