Banking inquiry: 'Government ignored critical European warning on heating economy'
A critical warning from the European Commission about overheating in the Irish economy was ignored by Government, the head of the Commission’s Economic and Financial Affairs said today.
Marco Buti, director general, said Ireland’s finances had first hit the Commission’s radar with the Government’s draft budget for 2001.
The Commission was concerned about “clear signs of overheating” in the economy fuelled by an expansionary budget.
He told the Banking Inquiry that the signals of “potential macroeconomic problems” prompted the Commission to issue a “critical opinion” to the Irish Government on January 24, 2001 to avoid further overheating by containing public expenditure
“As some of you may remember the recommendation was not very well received in Ireland. It was not implemented”, he added.
“Also many in the economic profession derided the Commission, accusing us of focusing more on decimals rather than acknowledging the strength of the Irish economy.”
Mr Buti stressed the “clear inconsistency between the government’s budgetary plans on the one hand and the economic policy guidance endorsed by the European Council on the other.”
In subsequent years, he said, the Commission “did not shy away from taking a critical view of Irish fiscal policy making” and regularly expressed concerns about strong government expenditure growth.
Consistent urging for strictly controlled government expenditure “did not fall on fertile ground in Ireland.”
Mr Buti said while he was “not trying to argue that the Commission saw everything coming, but couldn’t do anything.
“What I am trying to say, however, is that the Commission did, within its remit, pinpoint issues which in retrospect turned out to be important.
He also highlighted the fact that even if the Commission had anticipated the bust in Ireland “we would not have had the legal tools for asking Ireland to take any corrective measures.”
National supervisory authorities, said Mr Buti, were responsible for applying and enforcing the minimum prudential requirements set out in EU directives.
They “worked under the assumption that the national supervisors and regulators would be well equipped to address any nascent stability issues in the banking sector.
“We assumed they would do their job in a conscientious manner”
In the case of Ireland the financial supervisor, he said “did not acknowledge and address the risks associated with the credit and housing boom”.
While acknowledging that financial supervisors in other countries shared some of the responsibility this was “not to detract from the primary responsibility” of the Irish regulator.--