Transcript Comments by Vedran Šišić

Comments on:
“Euro Membership and Bank Stability: Friends or
Foes?
Lessons from Ireland”
by
Patrick 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



Complacency about possible fallout



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
“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)
Belgium
220
Denmark
200
Germany
Ireland
180
Greece
160
Spain
France
140
Italy
120
UK
Latvia
100
05
20
06
20
07
20
20 08
09
2 0 ( f)
10
( f)
20
04
20
03
20
02
20
01
20
00
20
99
19
19
98
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 membership and financial markets


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
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