Stress tests of the Irish banking system should happen as soon as possible and if the banks then need capital it has to come from an EU fund, former government adviser Alan Ahearne has said.
Politicians could be tempted to delay the stress tests for as long as possible to avoid making a decision on how to recapitalise the banks, but for the credibility of the economy and to ensure there is a full and sustainable return to the market, these tests have to happen quickly, he said.
Mr Ahearne was speaking before the Oireachtas European Affairs Committee on evolving economic and monetary union and the implications for Ireland. He was joined by fellow NUIG economics lecturer, John McHale.
The Irish Government tried to introduce burden- sharing measures at the end of 2010 but these were resisted by the EU. Consequently, it is only fair that if the Irish banks need capital after the stress tests, then this should come from Europe, said Mr Ahearne.
The timing of the stress tests of the banking system still has to be agreed. Finance Minister Michael Noonan recently said he would like the tests to be carried out at the same time as the EU-wide stress tests scheduled for next March.
However, the IMF said in its 9th review of the Irish economy that it would like to see the stress tests carried out before the country exits the bailout programme in November.
Several members of the committee asked both economists whether there should be an easing of austerity measures agreed with the troika.
Mr Ahearne said that the Government should aim for the 3% deficit target by 2015: “This might not mean that there has to be €5.1bn in consolidation over the next two years. It might only need €3.5bn or €4bn in budget cuts. If the full €5.1bn was introduced that might mean the Government would have a 2% fiscal deficit by 2015.”
He added that the markets would be comfortable with the Irish Government aiming for the 3% target.
To this end, he clashed with his NUIG colleague. Mr McHale, who is also a member of the Irish Fiscal Advisory Council, urged the Government to proceed with the scheduled €5.1bn in cuts because there was a one-in-three chance that the economy would miss its growth targets and consequently, it would not reach the 3% budget deficit.
Mr Ahearne said an EU banking union was essential to break the link between the banking system and sovereigns across the region. However, progress towards a banking union remains far too slow, he added.
Mr McHale added that the social fabric in distressed eurozone countries is unravelling with the possibility of a loss of democratic legitimacy looming.
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