John Bruton

Opinions & Ideas

Category: Financial services in Ireland

A letter to President Barroso of the European Commission

The following is a letter I have sent to President Barroso of the European Commission.
I feel that many comments are being made  about the loans being extended to Ireland by the EU and the IMF, which suggest that Ireland alone has a responsibility for what has happened, and that Ireland alone,  is being bailed out by the generosity of others.
This is not the full story, and I try to put the other side of the story forward, in my letter below to President Barroso.
Dear Jose Manuel,

I read your response to questions in the European Parliament about the Irish fiscal situation, in which you seemed to be suggesting that this situation arose solely because of irresponsibility in Ireland.

I agree the main responsibility does rest with Irish institutions, the Irish Government, the Irish Central Bank , the Irish banks, and the Irish individuals who borrowed irresponsibly.
But you should know that this is not the whole story. British, German, Belgian, American, French banks, and banks of other EU countries, lent irresponsibly to the Irish banks in the hope that they too could profit from the Irish construction bubble.
They too had available to them all the information about  spiralling house prices in Ireland, but they still lent the money.  These banks, who lent to the Irish banks, were supervised by their  home Central banks, who seemingly raised no objection to this lending, which was so  ill advised.  Their  home Central Banks also had available to them  the same information, that everybody else had, about the imbalances in  the Irish  housing market and the disproportionate increase in house prices   relative to incomes in Ireland.

So these non Irish Central  Banks must take some share of responsibility for the mistakes that were made. Yet the non Irish banks, who so foolishly lent to the Irish banks,  are now being spared any share in the losses, because  the Irish taxpayer is bailing them out.
I feel you should acknowledge that. You did not do so in your statement in the European Parliament

I also believe the European  Commission was involved, under the Treaties, in some responsibility for supervising the Irish economy,  and that  it too had full information on the obvious imbalances I refer to above. You ought to have acknowledged that responsibility of your own institution, which the Commission shares with ECOFIN.

What did the Commission do at the time about the Irish housing bubble?

What did the ECB do?

Nothing very effective, it seems.

Some reflection on that would be appropriate to accompany your fully justified criticism of Irish failings.

The fact  also is that interest rates in Ireland were too low in the first years of the euro. They were kept low by the ECB, because of the needs of other EU countries, which were not booming in the 2002 to 2007 period as Ireland was. That is also, in part, a European responsibility, although, of course,  the Irish authorities should have found other measures to compensate for the fact that the ECB was pursuing interest rate policies that were  unsuitable to Ireland.

You were right in the European Parliament to remind the Irish people of their recent policy failings, but you should tell the whole story, not just one side of it
Ireland’s bank guarantee in 2008 may have prevented a  Europe wide banking collapse in 2008. You did not refer to that possibility at all.  Do not forget Credit Anstalt in 1931, or Lehman Brother in 2008.

I hope you will find an opportunity to redress the balance in a future statement.

Yours sincerely
John Bruton  (former Taoiseach and former  EU Ambassador)

Political Reform in Ireland…..Would it prevent a repetition of past errors?

There is a lot of discussion in Ireland at the moment about  what is loosely described as political reform. The assumption seems to be that the financial and banking problems the country faces are  due in part to a  failure of the” system “. The implication of this is that if the “system” were different,  different, or more timely,  decisions  might have been taken.
Reform should never be an end in itself. Bad reforms can make a bad situation worse.  Changes have costs as well as benefits. So it is important to define what one hopes to achieve by particular reform. One should define very clearly in advance the output one is looking for, not just the input.
Is the output hoped  from the reform simply to be  saving money?
Or is it more informed and careful decision making? Or, on the other hand, quicker decisions?
Is it having a different type of person in politics? If so, what kind of person?
Or is it tilting the power balance more in favour of elected (and therefore accountable) public servants , as against public servants who have not  had to stand for election?   Or is it to continue the trend of the last 50 years which has  moved power away from elected Ministers to  “expert” or “independent “ entities”?
Is it to give more power to the opposition and backbenchers relative to Government, or the reverse?
All changes have costs, as well as benefits. A reform should only be made if the benefits are greater than the costs.
More accountable or more informed decisions may also be slower decisions.  Safeguards do not always come for free.
Time spent giving an account of past failures, or answering parliamentary  questions or freedom of information  request ,is time that is not available for some other kind of work.  If every TD can ask lots of parliamentary questions, the quality of answers may suffer. It is often the boring questions that are the most important, but the media will not report them, and TDs need coverage in the media to convince their voters that they are working
All public servants, elected or not, are human. Requiring decision makers to account on a daily basis for what they are doing may make them more susceptible to short term pressures, and less careful about long term, or wider, interests.  
Giving more power to experts will mean less input from the general public.
Having fewer politicians will save money, but it will mean less public access to politicians.  Paying politicians less may mean having more part time politicians, as we had up to the 1960’s.
The big policy failure in Ireland took place between  2001 and 2007, when Irish banks were  allowed to borrow huge sums from abroad, which they lent on to people buying , selling or developing  buildings of all kinds here and abroad.  Would those mistakes have been avoided if we had a different political system?
I am not certain of this. There were warnings, as early as 2003, from the IMF about house prices in Ireland, but these were not pressed. Even the OECD said, as late as 2007,  believed the banks  problems were manageable.  Some who knew enough to be really worried may have kept quiet because they did not want to be personally accused of causing a collapse by spreading panic.  Some warned of problems in 2006, but by then it was really too late anyway.
We need are people who are willing to be unpopular, who are willing to say things that  the general public and the media  really do not want to hear, and which may damage the interests of  powerful people.
We need an ability not just to question decisions, but to question and examine all the assumptions on which decisions are made.
It was the unexamined assumption that excessively high house prices in Ireland would unwind gradually, and that there would be a soft landing, that was the central cause of Irelands financial  downfall. Why was that comfortable assumption not challenged in 2002, 2003, and 2004? 
Why was the Central Bank not challenged for being insufficiently conservative in those years?  Given that such a challenge would have been very unpopular at the time with house purchasers , builders, and media advertisers, what mechanism do  we now need to introduce into our political system to ensure that, in future, such a challenge will not only be made, and, more importantly,  will be heard?
A meaningful political reform must one in which the underlying  (often over optimistic ) assumptions of policy decisions  are made explicit , and then are rigorously questioned
It must provide time in the Dail and Senate, and space in the media, for such questioning, especially where such questioning runs counter to the prevailing consensus.    

Financial Services in Ireland

THE JOB POTENTIAL OF FINANCIAL SERVICES IN IRELAND


I am looking forward to helping the international financial services industry in Ireland make an even greater impact on job creation in this country, when I take up my role as Chairman of IFSC Ireland in September. In the meantime, I am reading and listening.

The industry already provides about 25000 jobs directly in banking, funds management and insurance, and supports many more jobs indirectly in back up services like accounting, law, and hospitality.

Wholesale financial intermediation creates about 7% of the GDP in Ireland as against 2% on average throughout the EU, and 4.5% in Britain.

About 10% of all EU funds under management , are managed here in Ireland ,a country with only 1.4% % of the EU’s GDP.

This is a highly competitive industry. Modern communications mean that these services can be provided in any number of places or time zones. They will continue to be provided in increasing quantity in Ireland but only if Ireland continues to offer a top quality financial, social and regulatory environment. This is a people based industry, so a supply of well educated and motivated young people, who want to work in Ireland ,is crucial.

A key figure in the industry, Willie Slattery, pointed out last weekend that the economic downturn has had a side effect of making Ireland more competitive because it has led to a significant reduction in relative labour , office accommodation, and other costs in the past two years. The reduction in housing costs will also have helped in attracting staff here from overseas.

I believe it is critical that Ireland have a reputation as a thorough, rigorous, and pragmatic regulator of the industry. These three characteristics complement one another. Nothing is to be gained either by laxity or rigid formalism. At the end of the day, it is all about winning and holding trust, and in that there is no divergence of interest between regulator and regulated.


RESTORING ECONOMIC GROWTH


The success of the endeavour depends very much on Europe’s success in restoring economic growth. The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis the emerging economies of China, India, Brazil and others over the past twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the eventual cost of ageing societies, and the ephemeral nature of some of the innovations of the so called “new economy”.

The boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European countries is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private, capital and labour, tangible and intangible. We need a new way of thinking , an enhanced orientation towards finding ways to earn a living from meeting the needs of the rest of the world.


PUTTING THE EURO BACK ON A SOUND FOOTING


As many of you will know, I am a strong believer in the European Union, the world’s only historical example of an entirely voluntary, and democratically sanctioned, pooling of sovereignty between different nations, many of whom were at war with one another in living memory. No other part of sthe world has attempted anything as ambitious, or as successful as the European Union.

I know that there is not a little concern at the difficulties of the euro and complaints that the EU’s policy makers have been slow in rectifying what may be seen as substantial omissions in the original design of European Monetary Union.

But all of this should be kept in proportion. In January 2001, the euro was worth 92 US cents. It subsequently rose as high as $1.59, thereby affecting euro zone exports as anyone living along the border with Northern Ireland can confirm. It has recently fallen back from that to a lower, and perhaps more sustainable, level. But that is a level well above where it was in 2001.

The arguments that are now taking place in the EU now about bail outs, about surveillance of national budgets, ECB bond purchases, about supposedly pro cyclical budget cutting, about moral hazard, about the need to devise a workable resolution mechanism for large but insolvent entities, and about the exact amount solidarity which member states of the euro owes one another, are all real arguments, concerning real choices ,on which there are legitimate grounds for disagreement . There is nothing wrong with the fact that there are vigorous arguments between countries about these issues at EU level, just as there are at national level. That is normal politics.

The criticism of the EU that has the greatest validity, in my view, is that it has waited for foreseeable problems to become acute before tackling them.

It is not so much the EU’s decisiveness, as its foresight, that has been open to criticism.

It was foreseeable that the combination of a single centralised monetary policy, with divergent and decentralised fiscal policies would create contradictions.

We must not make the same mistake again. We must show foresight, and intellectual rigour, in regard to the problems looming on the horizon.


THE GERMAN CONSTITUTION AND THE EURO


There is one matter affecting the euro, and the solidity of the European economy generally, on which foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed closer fiscal policy integration in the euro zone is compatible with the German Basic Law or constitution. For understandable historical reasons, German Courts take democratic norms and the sovereignty of the people very seriously.

Issues that may be at stake before the German Constitutional Court are whether


1. The increased EU surveillance of the German budget, or

2. The large new German contribution to the special vehicle being set up to help euro member states with funding difficulties,


run afoul of the German constitution or Basic Law. It is important for markets ,and for the economic stability of Europe and the world ,that the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.

The Court has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a preview of its thinking. It emphasised its belief that the sovereign state is still the main vehicle presently available for democratic governance.


DEMOCRACY THE KEY TEST


It said then that “an increase in integration(in the EU) can be unconstitutional (in Germany)l if the level of democratic legitimation (in the EU) is not commensurate to the extent and weight of the supranational power or rule” at EU level

And it has added that, for it, the test of democratic legitimation is whether “the allocation of the highest ranking political offices” takes place by means of “competition of Government and opposition” in a free and equal election . Essentially the question it posed was ..can the people vote the EU government out of office? Even though the European Parliament is directly elected, it not believe that the EU yet passed that democratic test. And they are right, the people of the EU do not have an opportunity to vote the EU government out of office.

The Court was therefore very reluctant to agree to further EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in democratic governance at EU level. Otherwise it favoured keeping power at the level of the states because it argued that the states of the EU have a more developed democratic practice than the EU does ,at the moment.

I am certain this issue of whether there is sufficient democracy at EU level will arise again in any appeal to the Court against the proposed closer integration of Germany in responsibilities to, and for, the rest of the euro. Such an appeal will take place and has the potential to destabilise financial markets unless something is done to forestall the problem.

I have long advocated a simple remedy to this problem.


ELECTING AN EU PRESIDENT DIRECTLY


The Stability and Growth Pact, governing the euro, was finalised at the Dublin Summit of 1996 during the Irish Presidency. During that same Presidency, I commissioned a study on the possible direct election of the President of the European Commission by the people of Europe in a free and equal election of the people of the EU.

I really do not believe that it would be wise for EU leaders to sit and wait to see what the German Court might say . Its jurisprudence is already published in its judgement on the Lisbon Treaty.

That judgement should now be studied carefully, and urgently, by The European Council, the Commission ,and the Eurogroup.

The European Union must further improve democracy at EU level, to an extent that would make whatever further EU integration is necessary to underpin the euro, acceptable to the German Constitutional Court. It is as simple as that.

This could, for example, be achieved by providing for a electoral competition, among all the people of the EU, for the posts of highest ranking political actors in the EU.

The European Council could decide, without changing the Lisbon Treaty, that in future it will only nominate as President of the European Commission, as President of the European Council, and/or as President of the Eurogroup, a person who has won a majority of votes in an EU wide election for that post, held on the same day as the European Parliament election.

That would create a similar level of democracy at European level to that we each enjoy at national level.

Finally, the idea of a direct EU wide direct election is not as radical as it might seem. In December 2002, the Laeken European Council specifically asked the European Convention to examine this matter, but that never happened . All the emphasis was put on increasing the powers of the European Parliament, but direct election of a President by people themselves was never seriously considered. Nor was any change in the electoral system to the European Parliament itself.

The present crisis is an opportunity ,not only to deal with long hidden fiscal problems, it is also an opportunity to make the European Union even more democratic.


Speech by John Bruton, former Taoiseach, at the Annual lunch of the Federation of International Banks in Ireland on Wednesday the 2nd June at 12.50 pm in the Westin Hotel, Dublin


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