Speech by the Taoiseach Mr. Brian Cowen TD at the Citi Research Day, in the Shelbourne Hotel on Monday 11th January 2010 at 12.45pm.
Ladies and Gentlemen
I am delighted to be here today and to be associated with Citi's "Research Day".
When I opened Citi's new Research Centre in the IFSC last September, I referred to the significant role played by Citi in the Irish economy. 2010 marks 45 years of investment in Ireland by Citi - who now employ close to 2,000 people here.
Citi's Capital Markets Division, which is the team presenting today, operates in 100 countries worldwide and I know that Ireland is a key location for you.
I hope that events like this today will maintain this profile and help promote Ireland as a global financial services centre.
Irish Economy
I know this morning you have been discussing the global economic outlook for 2010 and beyond - and its implications for the financial markets.
The word unprecedented, regularly used in the context of the global situation that we have faced, doesn't come near to describing the magnitude of the events that have occurred since the summer of 2008. The events have led us to question the very basis of the global financial system. It has led us to re-think the role of the State in relation to financial markets and markets in general. It has led some to question conventional macroeconomic theory and it has led many to question how society and our institutions were unable to prevent a global credit-fuelled boom and bust. It has also led us to question - even more than before - the accuracy of economic forecasts.
It has been said that an economic forecaster is like a cross-eyed javelin thrower - he doesn't win many accuracy contests but he keeps the crowds attention!
Forecasting is an inexact science. When I became Taoiseach of this country in May 2008, the OECD and IMF were both predicting growth of around +3% for the Irish economy in 2009. How wrong that turned out to be.
As a small exporting economy, Ireland is particularly dependent on the performance of the world economy. Our trade amounts to 150% of GDP - making us one of the most globally-integrated economies in the world.
The global economic and financial crisis, combined with a dramatic correction in the domestic property market, has placed an enormous strain on the Irish economy.
Policymakers and analysts worldwide have been greatly challenged by what is regarded as the worst economic and financial crisis in a generation and the extraordinary scale of its impact. I have certainly never experienced the rapidity of events, the necessity for instant decision making, and the need to take risks in managing the crisis to ensure a country is not over-whelmed by it.
It has also been very difficult, in the face of understandable anger and worry, to communicate with the public about what are complex issues that must be addressed on an on-going basis. Politics and economics have collided and must work together to get us out of this difficult period. An economic policy is not much use if its does not gain the acceptance of the public and fails to result in the decisions necessary to enable recovery.
Analysts will differ on the appropriateness of various government interventions. In Ireland, we had to take risks and make bold moves to first protect and then set about resolving the problems in our banking system. We have had to take dramatic decisions in relation to our fiscal difficulties.
Most economic analysis and, most definitely, macroeconomics, does not allow for controlled experiments, where we can properly assess what would have happened if alternative policies had been pursued. We will never know the counterfactual - what would have happened. Nevertheless, the important point is that, globally, decisions were made, risks were taken, policies have been pursued and recovery is happening.
We, the Irish Government, were under no illusions about the scale of the challenges we faced and continue to face. As members of the eurozone, we did not have control over interest rates at a time when incomes were rising rapidly, there was a housing shortage and credit was cheap. Today we have fewer mechanisms available to ensure we make the economic adjustment required. We cannot print money and devalue to gain a competitive advantage.
Nevertheless, membership of the single currency has been of enormous benefit to us during the crisis and what we must do, and are doing, is to show flexibility in prices and wages to regain competitiveness and return to export-led growth.
I believe that Ireland has been showing the flexibility to adjust quickly - even more than other eurozone economies. We have made major strides in getting our house in order as quickly as possible. This has been acknowledged by the European Commission and others - and is reflected in the bond markets.
Fiscal Adjustment
I want to say a few words this afternoon about how Ireland has responded to the crisis, and to set out my Government's priority focus in the next few months.
The first part of our response has been to bring stability to the public finances.
We have acted decisively to tackle our fiscal crisis - taxation and spending measures implemented for 2009 amounted to an estimated 5% of GDP.
In 2010 we are making an adjustment of €4 billion, the equivalent of 2.5% of GDP. Importantly, this adjustment is predominantly by reducing expenditure, which international evidence shows to be more effective than increasing taxation in stimulating economic recovery. This applies particularly in a small open economy competing for international investment.
We have also indicated that future measures on the revenue-raising side will involve widening the tax base in an economically-efficient manner.
This process has been difficult and has asked much of the Irish people. But there are now clear signs of stabilisation. The Exchequer Returns for December 2009 show that tax receipts have stabilised and the overall deficit for last year was slightly better than anticipated in last month's Budget.
Nonetheless, our General Government Borrowing requirement for 2010 is projected to stabilise at last year's level - around 11½% of GDP - and further substantial measures will be required to correct this in the coming years.
We have set out a pathway for returning our deficit to below the 3% of GDP threshold under the Stability and Growth Pact by end-2014, and this approach has been welcomed by the European Commission.
While fiscal consolidation may weigh on the economy to some extent, it is also important to recognise that fiscal tightening can have some confidence-boosting effect - and there is some historical precedent for this in Ireland in the late 1980s.
As a small open economy, multipliers are low with a high propensity for leakage to imports and savings. We learnt to our cost in the 1980s that fiscal expansion through current spending worsened deficits without resulting in an economic upside. We then delayed making the fiscal adjustment leading to a loss of potential output with prolonged long-term unemployment. The fiscal consolidation that eventually followed provided a solid basis for the growth of the Irish economy in the mid 1990s and beyond.
We have learnt our lessons from the past. Our approach this time is not to delay the correction and not to take the soft option of relying solely on taxation measures. The stimulus we are applying is in the area of capital spending where multipliers and labour intensity are higher. Despite fiscal challenges, we are building for the future with a proportionate capital spend of twice the European average.
The key point I wish to make is that our budgetary projections, which are based on more prudent short-term growth assumptions than those of many commentators, show that we can make the difficult adjustment required. I believe the decisive action we have taken to date supports that conclusion and we have already made significant progress in turning the corner.
One indicator I would like to highlight is the improvement in the current account of the Irish balance of payments during 2009, an improvement which is expected to continue this year. This suggests that private sector balance sheets are being repaired, and that the economy is re-balancing. This, in part, reflects the relatively strong performance of Ireland's exports, which have shown remarkable buoyancy throughout the crisis.
Banking
A related challenge is reform of the Irish banking system.
The Government has again acted decisively, first to stabilise the system in Autumn 2008, and now to start restructuring it.
We have established the National Asset Management Agency to ensure that the banks recognise and deal with their losses, and are restructured so that they can return to their core business of lending to business and consumers.
The process of valuing the loans to be transferred to NAMA is underway and the Government has made clear our preparedness to provide further equity investment in the banks if required as part of the restructuring process.
We are also undertaking significant reform of our financial regulation system, consistent with developments at EU and international level, to ensure that our system is fit-for-purpose in the years ahead.
This process of restructuring our financial system will continue to be a priority focus of our efforts during 2010.
Restoring Competitiveness
The third aspect of our response is to restore our competitive position so that Ireland is able to return to the export-led growth which drove our success in the second half of the 1990s.
We have already seen evidence that Ireland is making the necessary competitive adjustment within the eurozone.
As measured by the HICP, Ireland's inflation rate during 2009 fell by an estimated 1.7%, compared to an increase of 0.3% in the eurozone as a whole. A further relative improvement in price levels is expected next year - again improving our competitive position.
There is also growing evidence of a downward adjustment in wage levels. On the basis of European Commission forecasts, unit labour costs in Ireland are estimated to have improved by 5% relative to the euro area last year.
National data show that earnings fell by 1.8% between the first and second quarters of 2009, and further movement in this direction is likely to have occurred as the year progressed.
In the case of public service wages, the Government introduced a pension levy in early 2009 of 7%, followed by a reduction in pay levels of between 5% and 8% in the 2010 Budget.
We also introduced a reduction in social welfare payments for those of working age of around 4% for 2010. Falling consumer prices have mitigated the impact of this on living standards.
There are few precedents for downward adjustments in incomes of this nature - and I believe it demonstrates a flexibility which will allow for recovery in the shortest possible timeframe. As I said before, we have learned from the past and are not delaying necessary decisions.
At the same time, we continue to invest heavily in infrastructure - with a capital programme of about 5% of national income in 2010 - proportionately the highest in the EU. Within this, we are prioritising projects with the most immediate positive impact on the economy and employment, which also lay the foundations for sustainable growth.
Outlook
The general consensus amongst commentators is that positive growth will now return to Ireland during 2010, although we will have to wait until next year before we experience a full year of growth.
From a medium to longer-term perspective, our future pattern of growth will, by necessity, be based on a more sustainable export-led economic model.
Economic Renewal - Building the Smart Economy
A lesson from severe global recessions is that, as well as weathering the economic storm, countries need to restructure their economies to plan for economic renewal.
Last December, we launched our Framework for Economic Renewal, 'Building Ireland's Smart Economy'. The 'Smart' in Smart Economy simply means 'high-productivity'.
I need not tell you of the importance of productivity as the key driver of economic performance and economic sustainability. In the 1990s Ireland demonstrated that a regional economy can enjoy sustained levels of high growth by exploiting competitive advantages in a defined number of sectors.
However, in recent years the contribution to GDP growth made by pure productivity growth, that is to say productivity growth net of employment and population growth, fell significantly in comparison to the late 1990s and early 2000s.
That tells us we have a problem we must fix. We must enhance productivity and, specifically, productivity per capita.
The Smart Economy framework has five action areas to do this:
1. Meeting the Short-term Challenge of securing the enterprise economy and restoring competitiveness - we must stabilise the public finances, get credit flowing and keep people in jobs. We must drive down costs;
2. Building the Ideas Economy - education and innovation have been shown to be key drivers of innovation. It is not just what products and services you produce, it is about how you produce them.
3. Enhancing the Environment and Securing Energy Supplies - productivity is enhanced by lowering carbon inputs into production;
4. Investing in Critical Infrastructure is critical for enhancing productivity- for example, good ICT infrastructure is essential to support businesses;
and, finally,
5. Making the public service, governance and regulation more efficient and effective.
The Smart Economy has, at its core, an exemplary innovation and commercialisation ecosystem. The objective is to make Ireland an innovation and commercialisation hub in Europe - a country that combines the features of an attractive home for innovative R&D-intensive multinationals while also being a highly-attractive incubation environment for the best entrepreneurs in Europe and beyond.
Innovation is the key ingredient to ensuring rising standards of living. General national welfare is highly dependent on the ability of a country to foster innovation and use that as a wealth building platform. Economic performance is not improved by simply adding inputs. It is how you use them.
An over-reliance on traditional manufacturing and low-skilled services will not be sufficient to allow developed countries like Ireland to remain at the forefront of economic and technological development. The world is becoming flatter; basic tasks are now being outsourced. Low-tech business services and contract manufacturing are migrating to low cost areas such as China, India, South America and the newer EU Member States.
Ireland can't rest its future on continuing to perform tasks that can easily be moved to low cost environments. Instead, we must provide goods and services higher up the value chain, in areas that are less cost sensitive, but require ingenuity and creativity.
And we have reason to be confident that we can do this.
We have a young, educated and English-speaking population with high educational attainment. We have an export-orientated culture and an attractive business environment. We have high-rates of entrepreneurialism and business start-up. We are part of a huge European labour market, largely untapped for innovation.
We have a set of multinationals that is the envy of the rest of Europe. Their presence and the evidence of technological convergence - the tendency for different technological systems to evolve towards performing similar tasks - creates a demand for innovation and partnering with start-up companies. This gives us a competitive advantage in innovation.
In the past, we have used one of Ireland's best attributes, our ability to be agile and to make quick decisions to get ahead of the game. We did that when establishing the International Financial Services Centre. We did that when setting out to become the European Headquarters for some of the world's best companies. Key public servants and politicians at the time foresaw what was possible and, despite those pressing short-term priorities and, I would imagine, some scepticism, they set about delivering what we have now - a fantastic multinational presence, a growing indigenous enterprise base, and an export-oriented economy.
Five years ago, less that one-tenth of multinational investments into Ireland were in RD&I. In 2009, this was nearly 50%. More importantly, those RD&I jobs anchor the presence of the multinationals. Moreover, in the worst year imaginable from an economic and investment perspective, Ireland more that held its own. Globally foreign direct investment decreased by 30% during 2009 yet Ireland continued to attract FDI with the number of investments decreasing by just 4% on the level achieved in 2008.
A lot of progress has been achieved in implementing our vision of a Smart Economy - and we will see more developments in the early part of 2010, including the publication of the report of the Innovation Taskforce.
Like many other countries we have identified areas where new jobs and businesses can be created in the green economy - targeting where we can achieve competitive advantage due to our size or natural resources.
The Government is also focusing on opportunities for growth in areas like the food sector, tourism and other international services. We will be driving forward strategies in all these sectors during 2010, targeting opportunities for Ireland to create new businesses and jobs.
International Financial Services
One particular area of opportunity identified in the Smart Economy Framework, which is relevant to this audience, is internationally-traded financial services.
While the sector currently faces challenges, it has shown a lot of resilience in the face of the crisis - maintaining direct employment of approximately 25,000 people.
The Irish financial services industry has a broad base of global multinational leaders, a dynamic cluster of innovative Irish companies and a large pool of people with specific domain skills and international expertise.
We believe the sector can continue to thrive and we are fully committed to further improving its international competitiveness working in partnership with the industry.
Conclusion
In conclusion I would like to thank Citi for organising this event in Dublin.
I hope that my comments on the Irish economy will have been of interest to you, and that they demonstrate both the progress we have made to date and our serious intent for continuing on this road.
We are living through a period of extraordinary economic change - and Ireland is one of the countries that has gone through some of the most difficult adjustments - but we are serious and determined about completing the adjustment, a task that is well underway.
Thank you very much for your attention and interest.
ENDS