Mr. Klaus Regling:

I think it is fairly critical. When I re-read it, I also had that impression. I hope it was fair, however, because there were many things to be criticised or to be critical about. Seen against the global context, there were not only home-grown problems. It was an unfortunate combination of home-grown problems against the global background of too much liquidity, too low interest rates for too long, and the search for yields from many parts of the world. It was also the time when Ireland joined the euro area, which had positive impacts. It prevented currency turmoil and led to the permanently lower interest rate. In a way we were all learning what a permanently lower interest rate meant. It is clear to economists that this is equivalent to a very strong, stimulatory monetary action, but it was the first time that something like this happened. We were aware that monetary conditions would be very easy because of the fact that Ireland had joined the euro area and would therefore have permanently low interest rates. It was clear that policy should react to that somehow.

We make the point in the report, for instance, that there was a final appreciation of the Irish currency in the exchange rate mechanism in March 1998, a few months before the beginning of monetary union. This was only done to act against this strong monetary push that was coming from the decline in interest rates. At the same time, we had a very loose global monetary environment. We had more financial market integration in Europe, in the EU, which was also something we wanted to see. It is one of the advantages of the Single Market, and of the euro, to have more financial market integration, but this also meant that there was more liquidity available than before. All this happened simultaneously.

With hindsight it is easy to say that stronger policy action, in those areas where it was possible, would have helped a lot. The two areas available were in fiscal policy and supervisory action. Unfortunately, as we describe in the report, fiscal policy moved from being counter-cyclical early in that decade, to becoming pro-cyclical later in the decade. It therefore added fuel to the fire.

On the supervisory side there was a light-touch approach, which was not intrusive or hands-on. Instruments that were available were just not used, or used very late and very little, like reducing the loan-to-value ratios. That is something that could have happened more forcefully, but one has to see it against the culture at the time. Today, everybody who deals with these issues talks a lot about macro-prudential supervision, but that was not very fashionable at the time globally, and not alone in Europe. With hindsight, however, it was clearly one of the areas, together with fiscal policy, where one could have done something and should have done more, but it did not happen at the time.

Going back to fiscal matters, there is a real issue here for me as an economist, that we were not able to calculate and are still not very good at calculating underlying fiscal balances. It is an unresolved issue. We learn as we go along but we always know more after a few years. I mentioned the IMF data that said in 2007, as I quoted, that the nominal fiscal balance was in balance. We thought the underlying structural deficit was very small at the time. Today we know it was bigger than 8% of GDP.

Our report is critical on all these points but the criticism is spread very widely. It is also spread towards economists who have not come up with a good methodology to calculate this. It is of course critical of bank governance, supervisors and fiscal policy makers, though not only in Ireland. The global background was not helpful at all. These different elements from all sides reinforced the problems.