It is a pleasure to speak to you this afternoon. Let me first take a moment to express my appreciation to the Commerzbank for hosting me here today. I would also like to thank Mr Herkenhoff for his kind words of welcome.
I came here directly from the airport and, standing here in the vicinity of the historic Brandenburg Gate, it is difficult to imagine a more impressive location at which to commence my first visit to Berlin as Minister for Finance. Indeed, I am told that a number of prominent Irish people have recently taken to the stage just outside this building. I understand that U2 gave a free concert here to commemorate the 20th anniversary of the fall of the Berlin Wall.
This is the first time I have been to Germany in my current role but it does not feel like it. I meet with Minister Schäuble, as well as our other EU colleagues frequently in Brussels and elsewhere that it feels like I must have been here before!
Germany is a close and important partner for Ireland in Europe, one of our most important in these difficult times. Germany is Ireland’s fourth largest export market, with merchandise sales of more than €7 billion in 2010. Latest figures for January-August 2011 show that exports from Germany to Ireland were up almost 15% while Irish exports to Germany were up 5%, which is very good news. While our main exports here are pharmaceuticals, chemicals and IT products, German consumers have also acquired a taste for Irish food and exports of beef and dairy products have increased substantially in the past two years.
In all 100 German companies, including the Commerzbank, have investments in Ireland and only the United States is more important to Ireland than Germany as a source of foreign direct investment. I know of an example from my own home county of Limerick how significant German companies are to our economy. Kostal, a German manufacturer of electronic control units for the automobile sector and of chargers for electric vehicles, is a leading employer in the town of Abbeyfeale. With our highly-skilled workforce and our enterprise-friendly society, Ireland offers German companies a positive and profitable environment for their international operations.
We are also pleased to welcome large numbers of German visitors to Ireland each year. After Britain and the United States, Germany is Ireland’s most significant tourism market. There is now very good value available to tourists in Ireland and last year more than 400,000 Germans visited Ireland. We hope to see that figure grow further in the coming years.
Our relationship with Germany is one which I personally value and I know that, in coming here, I can be certain of constructive and meaningful discussions.
Let me start these here now and in doing so, I intend to allow plenty of time for us to have a discussion together after I finish my opening remarks.
I want to use this opportunity to outline to you the steps which my Government and the Irish people have taken to address the current crisis as well as our views on the best way forward for the Euro zone.
The story of Ireland as 2011 came to an end is one of a country growing again, with stability provided by a government with a large majority and with economic stability and certainty now in place. Our programme is on track and in some areas ahead of target. Indeed, like Germany, Ireland retained its ratings – no mean achievement given the many downgrades across the eurozone last weekend.
Our turnaround now underway is quite simply a story of determination and sacrifice by the Irish people, together with prudent management by their representatives in the government I am honoured to serve. It is a story of a country and its people taking their responsibilities, confronting problems and dealing with them. It is also a story of solidarity by the Irish people with our European partners and solidarity from those partners towards us through our assistance programme in place until 2013.
Despite the uncertainty in the eurozone and the global economy, for the first time since 2007 the Irish Economy did return to growth in 2011 despite a difficult last quarter for all of us including here in Germany. This gradual recovery is forecast to continue into 2012 and subsequent years.
We are making competitiveness gains fast while last year saw the first current account surplus since 1999.
This growth is driven primarily by the exporting sector. As a small open economy Ireland has had to adapt quickly and positively to the severe economic downturn. Our recovery is export-led, and on the back of increases in export levels of 6.3% in 2010 and an estimated 4.6% increase in 2011, exports are at record levels. The pharmaceuticals, software, financial services, business services and food sectors all performing especially well.
The tourism sector grew also in 2011, by almost 7% in the first eleven months. Ireland has a world class product to offer overseas visitors and we anticipate that this level of growth – including from our German friends - will continue into 2012.
The Irish economy is one of the most open in the world. Exports account for over 100% of GDP compared to just 40% in the euro area and we have the third highest trade surplus in the European Union. This means that the economy is better placed to withstand the contractionary effects of budgetary consolidation. However, it also means we have a heightened interest in the performance of our trading partners in Europe and across the world. This is why we share Germany’s wish for immediate action to deal with the instability that affects the Euro zone.
As you are all well aware, our international obligation under the EU/IMF Programme of Financial Support and under the Stability and Growth Pact require us to make measurable progress in reducing the budget deficit. The international treaty currently being negotiated reflects these requirements and effectively applies them to all EU member states going into the future. This is a necessary discipline we fully support as long as there is equal and complementary focus on fostering growth and creating jobs. I am happy enough with the trend of the negotiations and look forward to a balanced agreement which helps secure our collective future.
Ireland’s path to sustainable recovery is set out clearly in our medium-term fiscal statement which I published last November. It envisages further budgetary adjustment amounting to a total of €12.4 bn over four years. This level of adjustment should cut our deficit to under 3% by 2015, in line with our commitments. However, let me be clear that this adjustment will be introduced in a manner which limits the negative impact on economic growth as far as is possible.
We anticipate that our gross government debt will peak at around 119% of GDP in 2013 and decline thereafter. Ireland’s annual budget for 2012, which I presented last month, will see our deficit to GDP ratio reduce to 8.6% in line with commitments. The package includes tax and spending measures which will involve fiscal consolidation worth almost 2.4% of GDP next year.
Taking account of Budget 2012, Ireland has implemented tough austerity measures equivalent to around 15½% of GDP since 2008. I hope you’ll agree that this is a significant figure by any yardstick and that you will appreciate the real-world human dimension of what such an adjustment means. It shows that we continue to honour the commitments made to our funding partners in the European Union and the IMF and it sends out a strong message to the financial markets that we are determined to stick to the plan.
However, Budget 2012 was not just about fiscal contraction. The budget, aimed at restoring confidence, re-building our economy and providing stability and certainty to investors who continue to invest so strongly in Ireland and Europe. So, as part of Budget 2012 I included a number of key elements to further promote international trade, attract inward investment and assist companies to develop into new and emerging markets.
I am fully aware that our 12.5% tax rate and our place in Europe are central to the attractiveness of Ireland for investors. Both the rate itself and the certainty around its retention have been crucial to Ireland’s economic development. It will not change as it remains crucial to our recovery back to the sort of sustainable, innovation-driven economy we were before we became too dependent on property and construction.
One can’t talk about resolving the current economic crisis anywhere without some focus on banking. I don’t think I need to tell this audience the extent to which the Irish banking sector was gripped by the crisis, the repercussions of which we still feel. One of my first major tasks the new Government faced was the restructuring of the Irish banking sector. In short we adopted a strategic approach to achieve the aim of creating a banking system that will meet our needs and that is rigorously regulated.
The first building block of this approach related to bank board Renewals and to Mergers.
The second task we set ourselves was that of recapitalization, the cost of which to the State reduced by €16.5 billion to €64 billion while still delivering the €24 billion required by our own PCAR system, based on extremely thorough stress tests. As many of you know, the residual amounts were provided by liabilities management exercises for subordinated debt and the successful sale of Bank of Ireland equity to a consortium of international investors.
The third task relates to deleveraging, with the banks set deleveraging targets for their non-core portfolios to be met by 2013.
Our fourth priority relates to the funding and liquidity position of the banks.
Through focus on the implementation of these steps together with a new supervisory framework, we aim to establish sustainable banks that can survive and prosper without the need for ongoing State support. Weaning the banks off State support will take time of course and will require improved profitability and market access. At the same time, we have to ensure that credit is available to the business sector, SMEs and consumers – all of whom will be an important source of future growth. The two pillar banks have been set ambitious lending targets.
As I said earlier, there are at present very important discussions taking place among European states on a new treaty which will include a “fiscal compact”. Ireland has been looking to discuss, with its partners, how we can review the significant progress that has been made on the banking sector and, indeed, how that progress maybe reinforced.
It is important to remember that Ireland has committed to ensure that there is no PSI for the Irish senior bank paper or Irish sovereign debt. This commitment has been agreed with the EU-IMF Troika and is now the basis on which Ireland’s future financing strategy is built. While the cost to the Irish taxpayer has been and will remain significant, the Irish government recognizes the need to work as part of the Eurozone in order to ensure a return to the funding markets in the future.
Later today I look forward to meet my good colleague Wolfgang Schauble here in Berlin. I come from the same European political family as Wolfgang and our links are strong. Naturally, we will discuss eurozone developments and in particular the negotiations on a new international treaty as I mentioned earlier.
What we are aiming for is real stability with credible firewalls to protect our economies. We consider that budgetary and fiscal discipline will offer much needed credibility to the Eurozone in the markets. It is also important that the legal agreement reflects the necessary distinctions between the different starting positions of Member States – some of us are small and open economies; others are large with significant domestic markets. These things make a difference.
The text is not yet finalised but I am cautiously optimistic that the correct balance will be struck based on the negotiations so far – negotiations in which Ireland has been very fully engaged given our own experiences.
But there is more than just a treaty in the mix. I suspect the good elements in the December meeting of EU leaders were somewhat forgotten, so I might draw your attention to them again:
the increased firewall through the more funding to be made available via the IMF,
the bringing forward of the ESM and -
something particularly welcome from an Irish point of view – greater clarity regarding Private Sector Involvement / PSI.
These were significant steps and there have been welcome steps from the key players beyond EU governments - above all, the co-ordinated actions by central banks and the ECB’s own actions in recent weeks. I would add that the global dimension was also reflected in the very helpful engagement of Secretary Geithner and others, notably our good friend and colleague Christine Lagarde.
Overall, as I’ve said elsewhere, we have to watch that we don’t get too excited by the abstracts that are things like treaties and governance arrangements. These are important, but we cannot lose sight of doing real business, real trade and working on real growth and recovery in the real economy. If we do that and the wider European and governance issues settle down, the financial community can get its confidence back and money should start moving again in a way which it’s meant to, to the businesses and the people it’s meant to go to.
I want to allow some time for Questions & Answers so I might conclude now. Overall we are determined, as a nation, to grow our way out of the current situation. The Irish economy has grown in 2011 after three consecutive years of decline. Positive signals are beginning to emerge, particularly in the export sector; just like Germany, we love to export and just like Germany, we make top-quality goods that people around the world want to buy.
My objective and that of the Irish government is not to bring us back to where we were just before the crisis – but instead to return us to the kind of sustainable, disciplined and innovation-driven economic model we had in the late 1990s. The Irish people are making serious sacrifices to help make this happen both in our national interest and in the wider European interest. Europe, with Germany as a leading nation within it, needs a winner in terms of crisis resolution; given the right climate, we can and should be that winner.
My key message to you is that we want to move out of the EU/IMF programme and return to the markets at the earliest opportunity. Subject to market conditions, the NTMA plans to position itself to step up issuance at the short-end (i.e. treasury bills/commercial paper) in the second half of 2012. Ideally, and if market conditions allowed, the NTMA would hope to follow this up later with some longer-term issuance, once market access has been demonstrated. Full re-entry to the bond market would follow.
I might finish by reiterating what my Prime Minister said here in Berlin two months ago – Ireland needs to stand on its own feet, needs to have a balanced budget and have a competitive economy capable of providing productive employment opportunities for our people. In everything I do as Finance Minister and in all the actions of the government, those are our overriding and top objectives.
Thank you very much.
Department of Finance
Upper Merrion Street