Ireland ‘ignored EC advice’ to stop economy overheating
Marco Buti and Dónal Donovan speak at Banking Inquiry
Ireland ignored advice from the European Commission to take measures to prevent the economy overheating prior to the banking collapse, according to the commission’s director general for economic and financial affairs.
Marco Buti said the commission issued a critical opinion on the 2001-2003 stability programme highlighting Ireland’s failing to contain its public expenditure.
He said the commission also recommended that the Government be asked to take countervailing measures on February 12th, 2001.
“Also many in the economic profession derided the Commission accusing us of focussing more on decimals rather than acknowledging the strength of the Irish economy,” he added.
Ireland’s economy started to “overheat” in the early 2000s but Europe did not have the authority to enforce responsible budgetary policies at the time, Mr Buti said.
“At the time we had a very limited set of tools within the stability and growth pact,” he said. “We called on the Irish authorities to behave responsibly but we did not have the authority [to enforce this].”
He said he agreed with those who concluded that the domestic financial supervisor did not acknowledge and address the risks associated with the credit and housing boom.
Mr Buti said economic growth became increasingly reliant on construction in the 2000s. Interest rates had declined and access to credit increased with Ireland’s entry into the EMU, which helped trigger a boom in investment and commercial property.
“House price inflation surged in Ireland. It rose by more than four-fold between 1993 and 2007, amongst the highest of any advanced economies,” Mr Buti said. “The supply of housing also rose sharply, but eventually beyond the needs of the population. The idea that house prices would increase forever turned into a recurrent and dangerous motive,” he added.
He said expansionary budgets negatively affected the Irish economy. Revenues became overly reliant on the property market but a shrinking tax base due to tax cuts left the budget exposed to the downturn in the property market.
He said “we saw the risks related to the housing market and we signalled that in a number of documents”. He said the commission used the tools at its disposal at the time to “ring the bell” but he added that this set of tools was “incomplete”.
Later the committe heard that the International Monetary Fund’s surveillance programme failed in Ireland during the years 2000 to 2007.
Former deputy director of the IMF Dónal Donovan said although the organisation noted some vulnerabilities in Ireland during the time leading up to the banking collapse, its assessments “gave no inkling” that a financial disaster was in the making.
He said the IMF got it more badly wrong in Ireland than he had seen in any other country. “I cannot recall in my experience a situation where the rosy picture turned so negatively in such a short period of time.”
Mr Donovan told the Oireachtas Banking Inquiry assessment of Ireland’s and other countries’ economies during this time were “overly positive”.
He said the IMF did believe house prices were “somewhat overvalued” during the construction boom but added that IMF staff and Irish officials implicitly “agreed to differ” over this question.