comments on: “euro membership and bank stability: friends or foes? lessons from ireland” by...
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Comments on:“Euro Membership and Bank Stability: Friends
or Foes? Lessons from Ireland”
byPatrick Honohan
Vedran Šošić, CNB
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Motivation To find the difference between Iceland and
Ireland
Answer:
One letter Six months
… but also
Central bank
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What makes Ireland special? World-beating property bubble followed by a fall
in property prices Collapse in the construction and real estate
business One of the most severe downturns anywhere in
the world
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Real house prices were amongst the fastest growing
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House price gap amongst the largest
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Why?
Real interest rate channel It was widely acknowledged and discussed E.g. Honohan (2006) provides an overview of the
literature on the difference between RIR and Taylor rule in Ireland
Complacency about possible fallout “The Myth” explanation and previous experience with
housing bubbles – whether it is sufficient? We need to better understand reasons for complacency in
order not to make the same mistakes all over again
Both effects were brought by eurozone membership
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Interest rate channel - Consumer prices
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Is it really that bad?(cumulative real GDP growth, 1998=100)
100
120
140
160
180
200
220
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(f)
2010
(f)
Belgium
Denmark
Germany
Ireland
Greece
Spain
France
Italy
UK
Latvia
Iceland
EU
Euro area
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What about the competitiveness channel?
Equilibrating force
Was supposed to deteriorate during the boom, but actual deterioration not so big
Flexible economy should make possible rapid improvement in competitiveness How persistent will the effects of the collapse be?
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Exports gaining ground even during the boom years
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Only mild deterioration of current account
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Role of the central bank
Substantial increase in ECB lending to Irish banks: Feb-2009 over Mar-2008 increase of 326%
Not dissimilar to CB of Iceland: Mar-2008 over May-2007 increase of 285%
However, Iceland had to turn to IMF because ability to lend in other currencies than krona was limited
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Eurozone as a policy anchor No exchange rate risk
Debt of eurozone members priced much more cheaply
Possible to save the finanancial system and conduct countercyclical fiscal policy
Eurozone membership and financial markets
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Role of other policies
Implicit assumption that other policies could have been used More restrictive fiscal policy, abolition of fiscal incentives Whether that would be sufficient, what else? Eurozone (aut also EU) membership makes impossible
many of the other options More discussion about what could make the difference
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Would this be possible inside the eurozone?
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To conclude
'Halt,' he croaked. 'Halt. What goes there?' ...'I mean, friend or foe?' he stuttered, trying to avoid
Mort's gaze.'Which would you prefer?' he grinned. It wasn't quite
the grin of his master, but it was a pretty effective grin and didn't have a trace of humour in it.
The guard sagged with relief, and stood aside. 'Pass, friend,' he said.
Terry Pratchett, Mort