Comments on:

1
Comments onEuro Membership and Bank Stability
Friends or Foes? Lessons from IrelandbyPatrick
Honohan

• Vedran Šošic, CNB

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Motivation

• To find the difference between Iceland and
  Ireland
• Answer
• One letter
• Six months
• but also
• Central bank

3
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

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Real house prices were amongst the fastest growing
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House price gap amongst the largest
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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

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Interest rate channel - Consumer prices
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Is it really that bad?(cumulative real GDP
growth, 1998100)
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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?

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Exports gaining ground even during the boom years
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Only mild deterioration of current account
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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

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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

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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

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Would this be possible inside the eurozone?
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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