Patrick Honohan - Governor, Central Bank of Ireland HARDtalk


Patrick Honohan - Governor, Central Bank of Ireland

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emergency is over. Is it? You know, it is a funny thing about

:01:17.:01:22.

economic developments and the way they impact people. When things are

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looking up and there is growth instead of decline, there is an

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enormous amount of positivity. That is the position. There has been

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positive growth in the past year, year-and-a-half.

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Employment is growing. Unemployment has fallen. Not just

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because of the high levels of emigration. Definitely the corner

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has been turned and we are moving back in the right direction. That's

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not to say there isn't a lot of debris lying around from this really

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severe recession. There's debris over indebtedness, indebtedness of

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the household level. There is unemployment. There is a lot of leg

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gisy that has to be -- legacy that has to be sorted and fixed. Part to

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be a position of whether Ireland has recovered its ability to act for

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itself. This is what the Finance Minister, Michael Noonan, said when

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the bail-out programme officially ended. He said, we are exiting the

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programme. Ireland will have been handed her purse back. That sense of

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restored independence isn't really true, is it? By putting less in it

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is what I suppose cynics would say. I don't actually see it in the same

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terms of gaining and losing independence relative to the

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assistance that we got from the international agencies, from the

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IMF, from the European institutions. Most Irish people, you for a while

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were having your economy run from Brussels, from the European Central

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Bank and from the IMF. The independent freedom of action was

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Lost when we were so indebted and lost the confidence of the markets.

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What we needed to do then was to regain the confidence of the

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markets, which we did, I would say in co-operation with the lenders. Of

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course it was a nuisance having them come around every couple of months

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and poke in and out. In fact, what they were urging the Government to

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do was, in almost wholly the programme that was,

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do was, in almost wholly the programme the majority programme of

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not only the politicians, but I would say the administrative system

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in Ireland. We knew what needed to be done. We actually laid out a plan

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which was substantially implemented. It was a nuisance having them

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around. They were giving the credibility to... And your point is

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in the debts of the crisis the policy prescription that the

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outsiders were coming up with is what the insiders knew had to be

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done too. Seems to me that is no longer the case. We are at a real

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interesting moment in Ireland right now, where the IMF and the European

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Commission, for example, are still insisting that austerity has to

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continue - the squeeze on the public budget has to be maintained, and

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there are politicians just a mile or so from here, who are saying, you

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know what, we can be flexible about austerity. It is time to loosen the

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belt a little bit. Where do you sit on that? Well, I think that the

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view, first of all we have a fully national,

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on that? Well, I think that the view, first of all we have a fiscal

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advisory council, set up of experts, representative of, broadly of

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opinion, of expert opinion, if you like, in the country, who also agree

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with what has to be done, which is to get 2 to 3% deficit next year and

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this would be my position and that of the Central Bank. The commission

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and the IMF, their message is clear - you is to keep going with the

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austerity and the politicians are no longer saying that. I... Well I want

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to choose which part of that to unpick. First of all, keep going

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with the austerity. Austerity is not that per se. It is what we are

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trying to achieve on the financial side, is to ensure that the draw,

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the additional borrowing which has to be a year on year, by the

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Government is something that the financial markets are prepared to

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do. Otherwise the Government cannot continue with its spending programme

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at all. That's why we have found this, I think reasonably cautiously

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and moderately the reductions of course in the Government spending

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and the increases in taxes have been massive and that is because of the

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over-spending and the over-indebtedness which occurred

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before the crisis. We have adjusted that down more slowly than other

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countries. We have been able to do that because of the international

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assistance and because of a broad consensus on how fast things need to

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be done. Since the crisis unfolded we now have this EU fiscal pact

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which now is much stricter about the way that Governments run the

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deficits and their national debts. Ireland right now, today, as a

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nation -- has a national debt which I believe is 120% of GDP. It's got

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to, got to, get that figure down to 60%, to fit with the EU's new

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strikures. Do you think that the Irish people actually understand

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what that means over the next decade? I think the Irish people do

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understand adjustment. They have been through it before n the 1980s.

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A very severe adjustment and they know that when you get that

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adjustment correct, the growth of the economy can respond very rapidly

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and reduce the effort needed to keep that debt on an adjustment track.

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The former Taoiseach, when he says that national debt burden and what

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we have to do to get it down, means that we, if we are honest with

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ourselves, are facing another ten years of austerity - is he right? I

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don't know what austerity means if it doesn't mean making sure that

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your finances are in a viable position. Nobody is going to hand

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you a gift. If they hand you a gift of course you accept them. If nobody

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is going to hand you a gift, you have to organise your affairs, so

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you achief the growth rate which generates the tax revenue that

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ensures that you are able to deliver on the public expenditure that is

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needed. That is not just needed for ten years, but all time. You need to

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manage your affairs so that you are growing the economy and generating

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the revenue to keep the debt in a manageable space. Let's bring it

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then to the sort of nitty-gritty of the workings of the Irish economy

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and where it goes from here. I came to this country, obviously over many

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years and I saw it boom through the tiger years and the early 2000s. You

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warned it was unsustainable and sure enough the crash was profound. You

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have talked about growth. I think it is 2% right now. Consumer confidence

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seems very fragile. I wonder how confident you are that Ireland can

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once again become one of the fastest growing, most dynamic corners of the

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European economy? I would say three things about that. First of all, the

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Celtic tiger phase, the strong productive phase of growth which

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lasted up until about 2000, that is what brought us up to the production

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frontier, where we can get to in Europe in terms of using modern

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techniques, efficient organisations and everybody at work. That was a

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one-off. Irish people shouldn't assume the tiger will ever return?

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We cannot get the 10% growth rates that were bringing us up to there.

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That was the horizon we reached. We should have acknowledged that and

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recognised we would have slower growth rates. Then we had the boom

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and bust bubble, which has severely damaged us, but has not undermined

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the economic model that generated that up at the frontier level. We

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still have that di nap mism to see that for investment. We are relying

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on that to keep us in a rapid growth. There'll be a bounce-back

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and we already had a rapid rate of employment growth last year. We hope

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it will continue in the short to medium-term. In the longer-term we

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should be on a strong, but nothing like the 1990s growth rate. You call

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it "a bounss back." You say -- a "bounce back" and you say you think

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it has travelled a corner. You travel in rarefied circles. I wonder

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how much time you spend talking to ordinary people trying to make a

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living? It is an interesting point you make. There is a danger that

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policy makers can get isolated and I do try to walk the streets. I try to

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see what's going on. I certainly know from the other side of it the

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number of meetings that I attend with a very interesting and cerebral

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group of people in banking circles, but you only get a part view. I have

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no doubt there is extreme distress and in the economy, I think I

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mentioned early on, the levels of unemployment, 11.8%, it was over

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15%. It is only as low as that, and I use that word in inverted commas,

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because so many young Irish people have left this country despairing of

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finding a decent job. Of course the migration has always been there as a

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safety valve. Migration in the last two or three years... Not unique.

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You can go back to the potato famine if you want. It is a rapid

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immigration and it has been an important part of our society. It

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has reflected, as you suggest a very, very weak labour market. With

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respect, when you talk to me about the consensus around realistic

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economic policy measures and you are talking about taxation... The reason

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the recovery has happened is we have applied realistic policies... It is

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not realistic to many people out there - property taxes, new water

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rates, a squeeze on a personal budget... Increased employment. I

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want to see results, we are seeing results. If we did not have sensible

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policies we would have high interest rates that would not be able to pay

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and have to squeeze public services more. We would not have an

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employment growth. We have to see the system in the round. I know that

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people are hurting. How much more hurt can they take? They are taking

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a lot of hurt now in this so-called recovery? There is an upturn. It is

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clear. It does not affect everybody. It is clear, we can see the jobs.

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There is a question of how deep the structural reform has been. I am

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thinking, for example, of streamlining, making more efficient

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Irish Government, privatisation programmes as well. Not only

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austerity, but privatisation. What I want to know from you is what you

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want. OK. Crisis is always an opportunity to

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make big changes. Perhaps we have not in the economy. There may be

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things that a lot of people want and I want. I don't sit here in the role

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of private citizen and I would have liked to have seen more done. Would

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you? What would you have liked to have seen more of? We could turn off

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and turn into a private citizen. We could have a nice chat about it. I

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should not invade a Government territory. I think there are plenty

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of opportunities for Government now and in years to come to make

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improvements. Already there's some truth in the fact, in the

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observation often made that Ireland has improved the efficiency of its

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structures in the 1990s and the 2000s and relative to some other

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countries. That is true. That may be why there has not been such huge

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press vur from the -- pressure from the troika. I think there are plenty

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of improvements. I am not just talking about liberal changes, there

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are lots of ways in which the Irish people's vision of their society

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could be more embedded. Well, this isn't politics - this is

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reality. One of the ways in which Ireland has, you know, the last

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couple of years to a certain extent to use your phase, "bounce back" is

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by attracting significant foreign investment into this country. It has

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always been good at that. It seems to me a lot of foreign companies

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come here because Ireland is something of a low-tax environment,

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a tax haven. I was speaking to someone yesterday, apparently

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Ireland is one of the biggest aviation leasing in the world. You

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have some individuals who have been successful at it. More and more

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comes have -- companies have come in because your tax system is... How is

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that, to attract foreign companies in because of a low-tax environment.

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They can come in, they don't necessarily do that much for the

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local economy. A lot of their profits are not based in this

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country. In the end they can easily leave, can't they? You know, as a

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young economist, 40 years ago, we used to have discussions about how

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dependant is Ireland going to become on No-tax environment and foreign

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companies that would be Footloose and a lot of people, including

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myself sceptical that this could last. It has lasted for a long time.

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We must be offering something more and of course we are.

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Than low tax. Another thing that was talked about many years ago Saying

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it will be an enclave economy, there'll be no link ages from the

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multinational corporations into locally-controlled companies. For a

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long time that was largely true. Then in the mid-1990s that sort of

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changed and locally-owned companies, in similar sectors and spin-offs

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became strong as well. This mould actually, OK, we may have -- this

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model, actually, OK we may have got hooked on it, because it worked

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well. If one thing was responsible for Ireland's meltdown it was the

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massive speculative property bubble, the way the banks irresponsibly lent

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into it and it came crashing down. This was the big thing. You said a

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short time ago, there is no way we are going to let things get out of

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hand again. Yes. In terms of that kind of bubble. It is a

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dysfunctional market. Some prices have gone up 70-80% in a year. You

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have parts of the country where ghost estates exist. You have the

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national bail out agency sitting on thousands of repossessed properties

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which it fears to put back on the market because it fears it will lead

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to another property crash. How will you fix it? The property price

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recovery, bounce back, has not been solely in Dublin. The other big

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cities have seen price increases. Where you don't see price increases,

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all around the rural areas, where the overbuilding was even greater,

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relative to demand. That is not all that surprising.

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Experts on the property market, housing which I am not, have

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calculated there is a need for a restart of building in Dublin and

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building is starting in Dublin because just the growth of the

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recovery, we are talking about and that supply response will in itself,

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even without any administrative action, the supply response will

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dampen down the price bounce back. Do you worry about complacency? I

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do. I will take action when it is needed. Talking about

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accountability, you are a very interesting figure in this country

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because you perhaps as much as anybody was a sort of whistle-blower

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before your time. You saw the crash coming. People maybe didn't listen

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to you closely at the time. You warned both the politicians and the

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leaders of the banks and the property businesses that what was

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happening in 05, '06, '07. I was working on the World Bank. I was not

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actually really focussing much on the Irish economy. My thought is

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this, you could see the terrible decisions, irresponsible decisions,

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some would say criminally insane decisions were being taken, in the

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Irish property market and Irish economy, nobody has ever, it seems

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in the political field, or arguably in the banks as well and the

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property business been properly held to account for what happened. A

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parliamentary committee is about to look again at what happened in 2008.

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Do you feel it is important to get to the bottom of it and hold people

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properly to account? Well, I think that the idea of a public inquiry

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which is now in preparation in which the main players, both in the

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private and public sector, come forward and speak their own words,

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is very important for the general public to understand in a deeper

:20:32.:20:40.

way, in a personal way the crisis. We know most of the elements. I

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don't think there are any great secrets to be undercovered. I would

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be very surprised. I don't know any great secrets which have not been

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revealed. Do you know exactly... Well, it seems to me one of the key

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questions in September 2008 is, why this blanket guarantee was given by

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the Government to cover, not just the depositors, but also the bond

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holders, in the banks, to ensure that the Government would take

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responsibility for all the debt. Why was that decision taken? I think we

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could go on at some length. This is something the Irish people want to

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know today. And I have gone on at length about it. For the next

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generation. No, no, it is important, but it is important to get it right.

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I just say a couple of things about it, I think it was based on poor

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information, as the risks that were being taken. I think it was poorly

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designed in, since that it could have been designed to exclude old

:21:42.:21:46.

debtholdings that were not going to run because they couldn't run. The

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risks could have been reduced and, so I think the big mistake, the

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failure in Ireland was not to realise the scale of the losses, the

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hidden losses embedded in the banks. And not to design the guarantee in

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such a way that if the worst thing happened, it would not be as

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damaging, so the guarantee was very blanket and the costs were enormous,

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although the servicing of those costs has been kept down. Do you

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think people have been properly punished? Those who made the biggest

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errors and in some cases it seems were not just operating based on

:22:28.:22:34.

mistaken ideas, but were actually... If people had been doing it for

:22:35.:22:40.

gain, that would be unquestionable. I don't see that it was people doing

:22:41.:22:46.

it for personal gain. The policy maker, the advisers were doing it

:22:47.:22:49.

because that was their perception of the best way forward.

:22:50.:22:51.

because that was their perception of the It was a mistaken perception. I

:22:52.:22:54.

don't think they were doing it in order to get some payoff. That's

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never been suggested. The question question. Do you think -- the final

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question. Do you think Ireland has truly learnt the lessons of the

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meltdown? Yes. Will it happen again? Well, I would

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have thought that our fiscal crisis of the 1980s would have cured us of

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excesses of any type for 100 years because that was very pain. And we

:23:19.:23:26.

got into a problem again. That is why it is important for people to

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have a deep understanding of the sort of decision-making processes

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that lead to error. It was not silly people, it was people who were

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hailed - I know of them as excellent and clever people, running the

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banks. They too made horrendous mistakes.

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And the processes that lead ordinary people and even super ordinary

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people, better than that to make catastrophic mistakes, that needs to

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be burnt into people so, they don't make that mistake again. Thank you

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very much for being on HARDtalk. Thank you very much indeed.

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and the truthfulness of establishments.

:24:36.:24:36.

When Barbara and I started the Review,

:24:37.:24:39.

we were seeking to examine the workings

:24:40.:24:42.

and the truthfulness of establishments.

:24:43.:24:47.

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