The decision by former European Central Bank president, Jean-Claude Trichet, to speak in Ireland on the banking crisis was welcome, even if the format through which he answered questions from members of the banking inquiry was unnecessarily contrived. It is easy to blame others for the crisis, but as Mr Trichet pointed out, many of the key decisions were made by national governments, notably to ignore budget guidelines when it suited them in the years running up to the crisis.
Mr Trichet is correct to point, too, at domestic Irish policy failures, even if he could have been more open in discussing the ECB’s own shortcomings. It is true that national central banks were responsible for local regulation and thus the primary responsibility for spotting the dangerous lending trends lay in Dublin, but like all international central banks, the ECB failed to see the systemic risk to stability coming from developments in the banking sector. Its decision to increase interest rates in July 2008 was also an extraordinary misjudgment.
Predictably, a key focus will be on Mr Trichet’s comments in relation to senior bondholders. The ECB was part of an international consensus which ensured that the senior bondholders in Irish banks were fully repaid.This left an unreasonable burden on Ireland even if, as Mr Trichet argued, the State’s early re-entry to borrowing markets has been successful and the economy is now recovering.
A balanced view must also acknowledge the extraordinary support extended by the ECB to the Irish banking system during the crisis. In warning that this funding support would be withdrawn if Ireland did not enter a bailout and implement austerity measures, the ECB arguably went beyond its mandate, particularly in putting pressure on to implement certain budget policies. That said, by November 2010, Ireland’s entry to the bailout had become inevitable. It is welcome that we have heard one ECB view of how this all came about, even if there is room to debate many of the points Mr Trichet made.