10 January 2014

BoI/Honohan: Ireland's EU-IMF Programme - Delivering what it says on the tin

"In cushioning the impact of the loss of market confidence resulting from the crisis, the programme did no more and no less than was promised on the tin. The rest is up to us", said the Governor of the Central Bank of Ireland at the DG-ECFIN Conference.

In his remarks, Honohan concentrated on the matters where the Central Bank was most closely concerned, namely the broad liquidity, fiscal and debt issues and repair of the banking system.

"A large number of other policy areas have seen action, consistent with what was set out at the start. Many of these would no doubt have happened in time, given that they had been long on the national policy agenda; some were no doubt accelerated. My overall impression is that most of the specific measures urged on the Government by Troika staff as the programme unfolded were sensible or inevitable; few were really bad ideas. And, as had been foreseen, the Government had a considerable leeway in choosing specific measures to meet the quantitative budgetary targets."

(...)

"So where has the Irish economy arrived in macro-economic terms after three years of the programme? Perhaps the best single picture for illustrating the pattern of macro-economic stabilisation is Figure 4 [see chart at end of speech] which shows that aggregate employment started growing again in 2012 and suggests that this resumes a gradually slowing trend that was in place for more than a decade before interrupted by a construction related surge in the mid-2000s. To those who wish to get back to the favourable and soundly-based economic conditions of the late 1990s, this is probably the most encouraging indicator. There is plenty of scope for disagreement on the quantification, but the pattern is likely to be valid.

At the same time the figure also hints at how far below previous trend and medium term potential the economy remains at this point. Unemployment, albeit moderated by emigration and labour market exit, stands at 12.4 per cent.

In any assessment of the major macroeconomic adjustments that have occurred, the impact on income inequality needs to be taken into account. Actually, we don’t yet have the comprehensive survey figures on this for 2012, but, while the available statistics indicate that the downturn has had a broadly similar average percentage effect on incomes across the distribution, an equal proportionate reduction in incomes of course hits lower income groups harder: there has been a substantial increase in the proportion of poor households suffering deprivation in the years since the crisis broke. A return to higher levels of employment will be a macro-economic key to reversing this situation.

The crisis will have a lasting unfavourable legacy. The accumulation of debt, public and private, will continue to weigh on growth prospects in a variety of ways. And many households are being affected by long term unemployment. But the damage can be ameliorated by a variety of means, including work on labour market activation and continued improvement of fiscal policy and measures.

Limiting the legacy damage is also the rationale for the Central Bank’s persistence in pressing the banks, in accordance with our mortgage arrears resolution strategy and targets, to accelerate their work to ensure that non-performing loans are brought back into performing status, and dealing with over-indebtedness by moving to sustainable solutions. These are tasks which remain work in progress, though progress that is now accelerating."

Full speech

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