High levels of public and private debt, the open nature of its economy and the fallout from Brexit all mean that Ireland remains especially exposed to a further financial crisis, according to Philip Lane, governor of the central Bank of Ireland.
He also believes that the recent pan-European stress tests on the European Union’s (EU) major banks confirmed that the financial system also remains vulnerable. Ireland’s Allied Irish Bank (AIB) was ranked as one of the weakest, second only to Italy’s Banca Monte dei Paschi di Siena (BMPS).
In a pre-Budget letter to Ireland’s finance minister Michael Noonan, Professor Lane cautioned that the country’s public finances are being boosted by temporary factors, including low interest rates, surplus Central Bank income and potentially a fraction of the surging corporation tax receipts.
He urged the government needs to devise alternative ways for measuring the Irish economy, following the Central Statistics Office’s (CSO) recent estimate that it grew by 26% last year. Although the CSO calculated the figure using European formulas, Lane suggested that local targets would be more resistant to statistical blips.
He also recommended that the government assume some of the recent corporate tax spikes would prove only temporary, stressing that a “prudent fiscal strategy remains essential”.
The government needed to set long term targets that annual budgetary decisions could be set against, which recognised Ireland’s ageing population and the resulting pressures on healthcare and pensions.
He also said the state should set its own national target for public debt, as the international debt-to-gross domestic product (GDP) metric needed to be supplemented in Ireland’s case because of the distortions around GDP as a measure of the growth of the Irish economy.
“At both European and domestic levels, the balance of risks is clearly tilted to the downside,” Lane warned in the letter, which has been publicly released by the Central Bank.
“Ireland is especially exposed due to the legacy of high public and private sector debt levels, the sensitivity of small, highly open economies to international shocks and Brexit-related vulnerabilities.”
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The country is expected to survive the review, which it must do to retain its place in the European Central Bank’s asset purchase programme.