Your Excellencies, Ladies and Gentlemen,
Welcome to Iveagh House. This is my first opportunity to meet many of you in my capacity as Minister for Foreign Affairs and Trade and I would like to thank you for accepting our invitation to this briefing which will focus primarily, but not exclusively, on the economy. Ireland is a trading nation. We export over 80% of our produce. The countries you represent are, therefore, not just friends but important partners in trade and investment.
It is almost two months to the day since the new Government entered office. We did so with a commitment that we would get the economy moving, restore confidence, fix our banking system and support the protection and creation of jobs.
Few countries have been spared the effects of the global contraction we have experienced since 2008 but, of course, some economies – in Asia, for example – have continued to grow at a healthy rate. What hardly needs underlining, however, is the extent to which all markets these days are inter-connected and that disturbances in one region can spread quickly to others in our global economy. From that it follows that we have a real and urgent interest in improved coordination and regulation at global level. We see the G20 as an essential forum in that regard. Some of you represent G20 member countries. Others, like Ireland, contribute indirectly to the Group’s deliberations through organisations such as the European Union.
The hardship inflicted by the global financial crisis on the Irish people has been acute. The damage caused by the recession is self-evident in terms of the costs to businesses and families and we have no illusions about negative consequences for our national reputation. We said in the Programme for Government that we are determined to restore Ireland’s standing as a respected and influential member of the international community and two months on that sense of determination is undiminished.
I have already met the US Secretary of State, Hilary Clinton, in Washington as well as a number of my European counterparts at meetings in Brussels and Luxembourg. As you know, the Taoiseach returned this morning from meetings with business and financial representatives in New York and I will be in London on Monday and then Oslo later in the week.
I am firmly convinced that engagement like this is the key to developing a better understanding of our policies and the particular concerns and sensitivities that drive them and I hope that the dialogue we have this morning will be of mutual benefit too. It’s good, as they say, to talk and I trust that you will find the exchange we have this morning as useful as I am confident it will be for myself and my colleagues.
The good news is that the world is through the worst of the recession. But, as the IMF has advised, the recovery is unbalanced, with advanced economies facing low growth and emerging economies faring better, albeit with some challenges.
Ireland faces this situation as part of a wider entity, namely the European Union. The EU binds us to our partners through an array of common policies, including a common commercial policy and a common currency - the euro – which is now the world’s second most important reserve currency. The global crisis has obliged the European Union to step up the level of governance that necessarily accompanies a shared currency and to introduce structural reforms that will allow the Union to boost employment initiatives and enhance its share of world economic growth.
The European Council in March was the culmination of months of hard work in different sectors and the comprehensive package which emerged covered economic governance, competitiveness and a new stability mechanism for the currency which will necessitate some Treaty change. Ireland took a constructive part in the deliberations and we are fully aware that the credibility and effectiveness of the package depends now on full implementation. Just last week, we submitted our macro-economic and budgetary outlook to the European Commission in our Stability Programme Update, together with the structural reforms we intend to pursue in our National Reform Programme.
Financial Assistance Programme
As you know, the previous Government was forced to seek external financial assistance from the European Union and the IMF in November. The incoming Government supports the objectives of the EU/IMF programme. The troika conducted its first quarterly review last month and their assessment was that the current targets are being met. “Ireland,” they said, “is making good progress in overcoming the worst economic crisis in its recent history. Programme implementation has been determined, despite the period of political change and an uncertain external environment.” The troika’s assessment, therefore, was that “the programme is on track but challenges remain and steadfast policy implementation will be key.”
Public Finances stabilising
The Government is also committed to the aggregate fiscal adjustment set out in the National Recovery Plan for the period of 2011 to 2012. Those of you who have lived here over the past two and a half years know what sacrifices have already been made by the Irish people in their determination to get to grips with the situation. Corrective measures totalling €14.6 billion were implemented between 2008 and 2010. This is a huge adjustment by any standards, amounting to over 9% of GDP, and it was followed by an additional €6 billion in cutbacks in the budget for this year. Further adjustments totalling €3.6 billion are envisaged for next year.
Despite the challenges, we also remain committed to the objective of reducing the General Government Deficit to 3% of GDP by 2015 but, given the degree of uncertainty about medium term growth prospects, we plan to review progress on deficit reduction when preparing the budget for 2013
Last week we revised our own forecasts for GDP growth in 2011 down from 1.7% to 0.8%. Despite this revision, all of the key forecasters expect a return to growth this year after three successive years of economic contraction and we are expecting growth of 3% per annum from 2013 to 2015.
A deficit of 10% is predicted for this year and this is within the terms of the recommendation made last December by European Finance Ministers. Thanks to our strong performance in exports of goods and services, the current account of the balance of our payments turned positive last year and it is expected to show a surplus for 2011 as a whole, an important development which points to the long term sustainability of the economy.
Indeed, the latest forecasts point to a primary surplus – an excess of revenues over expenditure excluding interest rate expenditure – by 2014.
Strenuous efforts are being made to close the gap between revenues and expenditure. The Comprehensive Spending Review, which we have announced, will be completed by the end of September. It will help the Government meet its overall fiscal objectives and will help shift the emphasis from financial inputs to outputs and impacts in next year’s budget. It will, in short, ensure that fiscal consolidation is under-pinned by the most effective use of resources.
It is important to acknowledge the revenue raising measures which have already been taken here since 2008. Income tax, capital gains tax, inheritance tax, indirect taxes, carbon taxes, pension levies and property taxes have all been raised during this period and the tax base has been widened considerably.
Of course, there has been no change and there will be no change in our corporation tax rate of 12.5%. Why? Because that would be wrong for us and, indeed, for our European partners. Ireland needs to grow its way out its current difficulties and research by the OECD has pointed to the importance of low corporate tax rates in encouraging growth. Since the 1950s we have used our corporate tax strategy to encourage the growth of domestic business and attract foreign direct investment. The strategy is fair and transparent. Ireland is in full compliance with both the European Union Code of Conduct on harmful tax competition and the OECD’s Forum on Harmful Tax Practices. This particular tax is an important source of revenue and corporation tax receipts were more than 30% ahead of target in the first four months of this year. It is clear that the 12.5% rate is critical to both our fiscal and industrial strategies.
Export-led recovery and improved competitiveness
Exports have been and will continue to be the main support for our economic activity in the medium term. Exports were up almost 10% last year and we ran the second highest trade surplus in the European Union, after Germany. The trend is continuing with exports up 11% in February alone and projected to increase by almost 7% for the year as a whole in 2011.
This export-led growth is underpinned by significant improvements in competitiveness. Consumer prices have fallen by 3½% here over the last three years, compared to an increase in prices of 2% in the euro area as a whole. Likewise wages have fallen here – by an average of 14% in the public sector and by about 12% in the private sector. The European Commission is predicting a 9% fall in unit labour costs in Ireland in the period from 2009 to 2012. The equivalent figure for the euro area as a whole is an increase of 5%, giving a net improvement here of 14%. The industrial production index was up by over 18% last year and the Purchasing Managers’ Indices remain buoyant.
Ireland remains an attractive and flexible place to do business and this is borne out by world competitiveness rankings which show that Ireland is:
§ 1st for corporate taxes;
§ 4th for the availability of skilled labour;
§ 4th for being open to new ideas;
§ 6th for labour productivity;
§ 7th for the availability of financial skills; and
§ 7th for the flexibility and adaptability of our people.
Boosting domestic demand
The relatively subdued growth figures published last week take account of the weaknesses in domestic demand. The jobs initiative, which we will announce next week, will be fiscally neutral but will focus on measures designed to help the domestic economy. It will give employers’ the confidence they need to start recruiting again and will comprise of targeted measures such as a reduction in the lower rate of value-added tax and halving employers’ social security contributions. The labour market is stabilising and the outlook is for a gradual improvement in employment between now and 2015.
The Government’s response to the stress tests on the banks in March was also crafted with a domestic stimulus in mind. Much of the focus on these tests has been on the large sums of money required to recapitalise the banks. But many observers have overlooked the fact that the financial measures programme includes significant growth enhancing measures. The restructuring includes a carefully thought out plan which will deliver a smaller banking sector fit for the needs of the real economy.
Given the level of State involvement in the shareholdings of the new banks, the Government is well-placed to insist that their core business will no longer be skewed in favour of the real estate sector and we will be rigorously monitoring their activities to ensure that credit is made available to small and medium enterprises. The credit supplied to these businesses should provide a welcome stimulus to the domestic economy.
Fixing the banks has, of course, added to the general government debt which is set to peak at 118% of GDP in 2013. This is, undoubtedly, a high level and highlights the need for sustained fiscal consolidation for the foreseeable future. A more useful measure of debt sustainability, however, is the ratio between interest payments and revenues. Interest payments are set to reach almost 21% of tax revenues in 2015. But to put this figure in context it is worth recalling that the comparable figure in 1985 was 32%. It was figures like these which prompted Morgan Stanley to point out recently that “Ireland is among the few euro area countries that have historically managed major turnarounds in fiscal policy (and the wider economy).” Indeed, on Monday when the French business daily, Les Echos, asked Klaus Regling, the CEO of the European Financial Stability Facility, about the sustainability of Ireland’s debt, he replied: “Ireland is applying the measures agreed in return for assistance with great determination. If Ireland continues in this way, the country will have an even more radiant future than before the crisis.”
We are acutely aware of the need to keep our shoulders to the wheel as we steer the economy out of the current difficulties but I am sure that you can also see how important issues such as relief on the interest rate are to us as well, given the tight environment we are operating in.
The reduction in the interest rate on the European Financial Stability Facility (EFSF) loan to Ireland which we are looking for would ease the burden of deficit reduction and ensure the sustainability of our national finances. The Eurogroup Summit in March agreed the rates for EFSF loans should be reduced to better take into account debt sustainability of recipient countries and this was echoed last month by Olivier Blanchard, Economic Counsellor and Director of Research at the IMF, who said “that anything which could be done to decrease the interest … would be very useful.” My colleague the Minister for Finance is now carrying the work on the interest rate forward in contacts with his counterparts, with a view to Finance Ministers being able to sign off on it soon.
As I said at the outset, it is important to us that we re-gain the confidence of the international community and I firmly believe that the best way to restore our reputation is to put in place strong policies on issues of national concern and to sell them vigorously at home and abroad. I have, for example, already referred to the decisive action we have taken on the banking sector and next week’s jobs initiative and I hope that this morning’s presentation gives both a rounded view of where we are and confidence in where were are heading.
Ireland has a small, open and very flexible economy. Indeed, a recent report by Ernst and Young ranked us as the second most globalised economy in the world. That has its advantages. It should mean, for example, that the recovery will be faster in Ireland than elsewhere when the global upturn gathers pace. But it also exposes us to down-side risks and it is only fair to acknowledge our exposure to, for example, adverse movements in commodity prices, exchange rates and interest rates.
The recent report by Peter Nyberg on Ireland’s systemic banking crisis carried the title “Misjudging risks” and there is no denying that Ireland walked itself into problems by doing just that, misjudging risks. My message this morning, however, is that we can emerge from these problems if we maintain a tight budgetary position and adopt the right growth-friendly policies. That is up to us. In turn we ask others not to misjudge us, not to underestimate us and not to price us out of the markets.
I would like to take this opportunity to turn to Ireland’s foreign policy and some major concerns and priorities for the Government in this area.
As a small State, Ireland is profoundly attached to multilateralism. Our commitment to the United Nations is a cornerstone of Irish foreign policy. Our committed and active membership is testament to our belief in the importance of effective multilateralism, respect for international law and the defence of human rights.
I will be travelling to New York in September for the UN General Assembly and I am looking forward to the opportunities I will have there for bilateral contact-making. Ireland’s firm commitment to the UN was given concrete expression recently in the Government’s decision to deploy some four hundred members of the Defence Forces with the UN peacekeeping force in southern Lebanon (UNIFIL) in the coming months.
Closer to home, Ireland is working with our EU partners and High Representative Ashton in the context of the EU’s Common Foreign and Security Policy (CFSP). This Government will be making an active contribution to the formulation of European responses to the major international challenges we are facing in the Middle East, North Africa and elsewhere.
Ireland’s strong commitment to the promotion of human rights in both our domestic and foreign policies arises in part from the historical experiences which have shaped us. It also reflects a strong public empathy with those suffering disadvantage, injustice or discrimination in any part of the world.
UN Human Rights Council
In 2006, Ireland declared its intention to seek membership of the UN Human Rights Council (HRC) for the term 2012-2015. This will be the first time that we have sought election to the Council. If elected next May, we will bring to our membership of the Council the same vision and values which have underpinned our involvement in other UN fora. We will work hard to build bridges, to enlarge the common ground and to promote consensus through open and frank dialogue.
It goes without saying that we would greatly appreciate the support of the Governments you represent for our candidature. We are already in contact with your representatives in New York and elsewhere and we will be approaching you in your capitals also. I am looking forward to the campaign, which will be formally launched over the coming weeks. We believe we have good credentials to be a member of the Council and we will be making a very strong case to your Governments.
Next year, as you will be aware, Ireland takes on another major international challenge: we will be chairing the Organisation for Security and Cooperation in Europe (OSCE). This is the first time that we will be assuming this role. The Chairmanship will provide us with a significant opportunity to contribute to international conflict resolution, drawing in the process on our own values and historical experiences. We will have a chance to further the goals of an organisation which plays a vital role in ensuring peace and security in the Euro-Atlantic and Eurasian space.
We will give priority during our Chairmanship to actions in the OSCE’s ‘Human Dimension’ area (human rights and fundamental freedoms), with particular reference to freedom of the media, including digital media. Governance is also likely to be a theme for our Chairmanship - particularly measures to tackle corruption and money-laundering. We will also avail of any opportunity that arises during the period of our Chairmanship to make progress towards the resolution of some of the more intractable conflicts which still exist in the OSCE region and I look forward to meeting you and to working with your Governments on all these issues in the months ahead.
I would like to close by thanking you for the attentive hearing you have afforded me this morning and for the ongoing work you do in developing contacts and communications between our respective countries. I am convinced that sessions such as this can help build up a better understanding of the issues and challenges we face and I would be happy to take any questions you might have.