Economic recovery dependent upon stabilising banking sector, claims Central Bank governor

THE economy has the potential to achieve solid growth again, but only if the country’s banking sector is stabilised as quickly as possible, according to Central Bank governor John Hurley.

Mr Hurley was addressing a meeting last night in Dublin of ACI Ireland, the domestic arm of the Paris-headquartered international financial markets association.

He said Ireland’s economy has the ability to achieve medium-term growth, allowing for a reduction in the rising unemployment rate, if the Government meets its economic challenges and stability is restored to the banking sector.

He said: “Future lower medium-term growth potential means cyclical recovery will not solve our fiscal problems. The Commission on Taxation and the Special Group on Public Service Numbers and Expenditure Programmes – which are currently underway – will have a key role to play in identifying measures that will improve the budgetary situation in coming years.

“These measures are necessary to restore confidence, deal with financing concerns and underpin the medium-term growth potential of the economy.”

Mr Hurley warned the global banking sector will be different, once the economic downturn concludes. “In Ireland, the very existence of NAMA [the National Asset Management Agency] will – in itself – be central to this. The banks that emerge from that process may well be smaller but better prepared for the new environment. This should allow for a more focused and consolidated banking sector.” he said.

Mr Hurley also warned that the international banking sector members based at Dublin’s International Financial Services Centre would not be immune from the period of “radical change” engulfing the industry, but should remain a valued part of the economy.

He also defended proposals by the European Commission for a new supervisory framework for the financial services sector. He said: “The proposal for new structures recognises the need for macro-prudential risk assessments to identify emerging vulnerabilities in the financial system and issue risk warning but also, crucially, the necessity to follow these with policy actions when appropriate.”