Financial Services in Ireland

THE JOB POTENTIAL OF FINANCIAL SERVICES IN IRELAND

I am looking forward to helping the international financial services industry in Ireland make an even greater impact on job creation in this country, when I take up my role as Chairman of IFSC Ireland in September. In the meantime, I am reading and listening.

The industry already provides about 25000 jobs directly in banking, funds management and insurance, and supports many more jobs indirectly in back up services like accounting, law, and hospitality.

Wholesale financial intermediation creates about 7% of the GDP in Ireland as against 2% on average throughout the EU, and 4.5% in Britain.

About 10% of all EU funds under management , are managed here in Ireland ,a country with only 1.4% % of the EU’s GDP.

This is a highly competitive industry. Modern communications mean that these services can be provided in any number of places or time zones. They will continue to be provided in increasing quantity in Ireland but only if Ireland continues to offer a top quality financial, social and regulatory environment. This is a people based industry, so a supply of well educated and motivated young people, who want to work in Ireland ,is crucial.

A key figure in the industry, Willie Slattery, pointed out last weekend that the economic downturn has had a side effect of making Ireland more competitive because it has led to a significant reduction in relative labour , office accommodation, and other costs in the past two years. The reduction in housing costs will also have helped in attracting staff here from overseas.

I believe it is critical that Ireland have a reputation as a thorough, rigorous, and pragmatic regulator of the industry. These three characteristics complement one another. Nothing is to be gained either by laxity or rigid formalism. At the end of the day, it is all about winning and holding trust, and in that there is no divergence of interest between regulator and regulated.

RESTORING ECONOMIC GROWTH

The success of the endeavour depends very much on Europe’s success in restoring economic growth. The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis the emerging economies of China, India, Brazil and others over the past twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the eventual cost of ageing societies, and the ephemeral nature of some of the innovations of the so called “new economy”.

The boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European countries is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private, capital and labour, tangible and intangible. We need a new way of thinking , an enhanced orientation towards finding ways to earn a living from meeting the needs of the rest of the world.

PUTTING THE EURO BACK ON A SOUND FOOTING

As many of you will know, I am a strong believer in the European Union, the world’s only historical example of an entirely voluntary, and democratically sanctioned, pooling of sovereignty between different nations, many of whom were at war with one another in living memory. No other part of sthe world has attempted anything as ambitious, or as successful as the European Union.

I know that there is not a little concern at the difficulties of the euro and complaints that the EU’s policy makers have been slow in rectifying what may be seen as substantial omissions in the original design of European Monetary Union.

But all of this should be kept in proportion. In January 2001, the euro was worth 92 US cents. It subsequently rose as high as $1.59, thereby affecting euro zone exports as anyone living along the border with Northern Ireland can confirm. It has recently fallen back from that to a lower, and perhaps more sustainable, level. But that is a level well above where it was in 2001.

The arguments that are now taking place in the EU now about bail outs, about surveillance of national budgets, ECB bond purchases, about supposedly pro cyclical budget cutting, about moral hazard, about the need to devise a workable resolution mechanism for large but insolvent entities, and about the exact amount solidarity which member states of the euro owes one another, are all real arguments, concerning real choices ,on which there are legitimate grounds for disagreement . There is nothing wrong with the fact that there are vigorous arguments between countries about these issues at EU level, just as there are at national level. That is normal politics.

The criticism of the EU that has the greatest validity, in my view, is that it has waited for foreseeable problems to become acute before tackling them.

It is not so much the EU’s decisiveness, as its foresight, that has been open to criticism.

It was foreseeable that the combination of a single centralised monetary policy, with divergent and decentralised fiscal policies would create contradictions.

We must not make the same mistake again. We must show foresight, and intellectual rigour, in regard to the problems looming on the horizon.

THE GERMAN CONSTITUTION AND THE EURO

There is one matter affecting the euro, and the solidity of the European economy generally, on which foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed closer fiscal policy integration in the euro zone is compatible with the German Basic Law or constitution. For understandable historical reasons, German Courts take democratic norms and the sovereignty of the people very seriously.

Issues that may be at stake before the German Constitutional Court are whether

1. The increased EU surveillance of the German budget, or

2. The large new German contribution to the special vehicle being set up to help euro member states with funding difficulties,

run afoul of the German constitution or Basic Law. It is important for markets ,and for the economic stability of Europe and the world ,that the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.

The Court has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a preview of its thinking. It emphasised its belief that the sovereign state is still the main vehicle presently available for democratic governance.

DEMOCRACY THE KEY TEST

It said then that “an increase in integration(in the EU) can be unconstitutional (in Germany)l if the level of democratic legitimation (in the EU) is not commensurate to the extent and weight of the supranational power or rule” at EU level

And it has added that, for it, the test of democratic legitimation is whether “the allocation of the highest ranking political offices” takes place by means of “competition of Government and opposition” in a free and equal election . Essentially the question it posed was ..can the people vote the EU government out of office? Even though the European Parliament is directly elected, it not believe that the EU yet passed that democratic test. And they are right, the people of the EU do not have an opportunity to vote the EU government out of office.

The Court was therefore very reluctant to agree to further EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in democratic governance at EU level. Otherwise it favoured keeping power at the level of the states because it argued that the states of the EU have a more developed democratic practice than the EU does ,at the moment.

I am certain this issue of whether there is sufficient democracy at EU level will arise again in any appeal to the Court against the proposed closer integration of Germany in responsibilities to, and for, the rest of the euro. Such an appeal will take place and has the potential to destabilise financial markets unless something is done to forestall the problem.

I have long advocated a simple remedy to this problem.

ELECTING AN EU PRESIDENT DIRECTLY

The Stability and Growth Pact, governing the euro, was finalised at the Dublin Summit of 1996 during the Irish Presidency. During that same Presidency, I commissioned a study on the possible direct election of the President of the European Commission by the people of Europe in a free and equal election of the people of the EU.

I really do not believe that it would be wise for EU leaders to sit and wait to see what the German Court might say . Its jurisprudence is already published in its judgement on the Lisbon Treaty.

That judgement should now be studied carefully, and urgently, by The European Council, the Commission ,and the Eurogroup.

The European Union must further improve democracy at EU level, to an extent that would make whatever further EU integration is necessary to underpin the euro, acceptable to the German Constitutional Court. It is as simple as that.

This could, for example, be achieved by providing for a electoral competition, among all the people of the EU, for the posts of highest ranking political actors in the EU.

The European Council could decide, without changing the Lisbon Treaty, that in future it will only nominate as President of the European Commission, as President of the European Council, and/or as President of the Eurogroup, a person who has won a majority of votes in an EU wide election for that post, held on the same day as the European Parliament election.

That would create a similar level of democracy at European level to that we each enjoy at national level.

Finally, the idea of a direct EU wide direct election is not as radical as it might seem. In December 2002, the Laeken European Council specifically asked the European Convention to examine this matter, but that never happened . All the emphasis was put on increasing the powers of the European Parliament, but direct election of a President by people themselves was never seriously considered. Nor was any change in the electoral system to the European Parliament itself.

The present crisis is an opportunity ,not only to deal with long hidden fiscal problems, it is also an opportunity to make the European Union even more democratic.

Speech by John Bruton, former Taoiseach, at the Annual lunch of the Federation of International Banks in Ireland on Wednesday the 2nd June at 12.50 pm in the Westin Hotel, Dublin