Comments on:“Euro Membership and Bank Stability: Friends

or Foes? Lessons from Ireland”

byPatrick Honohan

Vedran Šošić, CNB

Motivation To find the difference between Iceland and

Ireland

Answer:

One letter Six months

… but also

Central bank

What makes Ireland special? World-beating property bubble followed by a fall

in property prices Collapse in the construction and real estate

business One of the most severe downturns anywhere in

the world

Real house prices were amongst the fastest growing

House price gap amongst the largest

Why?

Real interest rate channel It was widely acknowledged and discussed E.g. Honohan (2006) provides an overview of the

literature on the difference between RIR and Taylor rule in Ireland

Complacency about possible fallout “The Myth” explanation and previous experience with

housing bubbles – whether it is sufficient? We need to better understand reasons for complacency in

order not to make the same mistakes all over again

Both effects were brought by eurozone membership

Interest rate channel - Consumer prices

Is it really that bad?(cumulative real GDP growth, 1998=100)

100

120

140

160

180

200

220

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(f)

2010

(f)

Belgium

Denmark

Germany

Ireland

Greece

Spain

France

Italy

UK

Latvia

Iceland

EU

Euro area

What about the competitiveness channel?

Equilibrating force

Was supposed to deteriorate during the boom, but actual deterioration not so big

Flexible economy should make possible rapid improvement in competitiveness How persistent will the effects of the collapse be?

Exports gaining ground even during the boom years

Only mild deterioration of current account

Role of the central bank

Substantial increase in ECB lending to Irish banks: Feb-2009 over Mar-2008 increase of 326%

Not dissimilar to CB of Iceland: Mar-2008 over May-2007 increase of 285%

However, Iceland had to turn to IMF because ability to lend in other currencies than krona was limited

Eurozone as a policy anchor No exchange rate risk

Debt of eurozone members priced much more cheaply

Possible to save the finanancial system and conduct countercyclical fiscal policy

Eurozone membership and financial markets

Role of other policies

Implicit assumption that other policies could have been used More restrictive fiscal policy, abolition of fiscal incentives Whether that would be sufficient, what else? Eurozone (aut also EU) membership makes impossible

many of the other options More discussion about what could make the difference

Would this be possible inside the eurozone?

To conclude

'Halt,' he croaked. 'Halt. What goes there?' ...'I mean, friend or foe?' he stuttered, trying to avoid

Mort's gaze.'Which would you prefer?' he grinned. It wasn't quite

the grin of his master, but it was a pretty effective grin and didn't have a trace of humour in it.

The guard sagged with relief, and stood aside. 'Pass, friend,' he said.

Terry Pratchett, Mort