Central Bank boss says US is partially to blame for Ireland’s economic crisis

Patrick Honohan waves the flag in London

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Central Bank boss Patrick Honohan

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The Governor of Ireland’s Central Bank has been bravely waving the flag in London for further financial integration across Europe, despite the Euro zone hardships being felt by the people of Greece, Spain, and elsewhere, and in his own country, of course.

And Patrick Honohan even chanced a pop at the USA in his speech at the Cass Business School at the City University.

“Cheerleaders for financial integration are having a hard time these days,” Mr Honohan told his audience. “It can seem that the financial crisis was exported from the United States and that the waves of liquidity surging around the world ended up washing away several years of growth in the advanced economies.”

Indeed, the Central Bank Governor added that it could fairly be said that “without the complacent expansion of credit by the globally integrated financial market countries like the United States, then Ireland and Britain wouldn’t be in the trouble that they find themselves today”.

However, Mr Honohan said he favoured looking at the wider and longer term issue of the approach that Ireland and other countries should be adopting in relation to financial integration.

He said, “After all, international financial integration is as much a product of technology as of liberalising financial policy and, as such, is with us whether we like it or not.

“Mostly we can like it, but it can and has run amok, so it needs well designed and policed regulation.

“My overall message is that we in these islands of Ireland and Britain have much in common as we work within European structures to develop more effective regulatory and policy regimes that will do a better job of handling financial integration than was managed in the first decade of the new millennium.”

The Central Bank Governor told his audience that it was in Dublin in 1933 that the economist John Maynard Keynes “made one of his earliest, most widely quoted and most succinct expressions of doubt about international financial integration”.

Keynes asserted: ‘Ideas, knowledge, science, hospitality, travel – these are the things which should by their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.’

Mr Honohan said for the elite of a newly independent Ireland who valued the financial stability they had inherited and retained from the colonial era, this was not a welcome message.  Indeed, the message was largely ignored.

“The one-for-one exchange rate parity for the Irish pound with sterling embodied first in a currency board arrangement and then with a limited-function central bank, survived for almost another half-century, as did the banking and stock exchange links.”

Asking whether Keynes was right in 1933, Mr Honohan reflected that “provision of banking and other financial services by foreign firms can convey lower costs and greater sophistication as well as better risk-sharing – but can leave the host country high and dry if the service-providers choose to withdraw”.

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