The macroeconomic imbalances that wrecked the Irish economy from 2008 onwards would have been flagged as needing urgent attention in 2005 under existing procedures, according to the Central Bank.
In a new paper produced by Central Bank economists Ronan Hickey and Linda Kane, it noted that the economic governance rules in place before the crisis erupted were hopelessly inadequate.
The Stability & Growth Pact did not monitor macroeconomic imbalances that were in the years leading up to 2007 becoming a huge problem in countries such as Ireland.
This country experienced a massive surge in credit and house price inflation while at the same time there was a steep losses in competitiveness.
Even though Ireland’s fiscal position met the Stability & Growth Pact criteria and unemployment was at the lowest level in the history of the State, as the imbalances blew up, this would cause a surge in public indebtedness and unemployment.
There has been a complete overhaul of fiscal and economic governance. As well and strict fiscal deficit and debt rules, there is now an macroeconomic imbalance procedure for every member state.
“In relation to Ireland, it is impossible to know for sure whether that the existence of such a procedure would have prevented the dangerous build-up in imbalances from occurring in the previous decade. It appears likely that, at the very least, the country would have been placed in an IDR by 2005 at the latest, when six of the scoreboard indicators were flashing,” note the authors.
“This would have resulted in enhanced external surveillance from the Commission and placed more of a spotlight on competitiveness, credit and house price developments. It is less clear whether this process would have resulted in Ireland entering an excessive imbalance procedure or, given the performance of the Stability & Growth Pact during the period, the extent to which the macroeconomic imbalance procedure would have reduced Irish imbalances prior to the financial crisis.”
Ireland’s imbalances are moving in the right direction even though they are unwinding at a slow pace. However, as these are mostly related to public and private debt, this is expected, added the authors.
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