Written answers

Wednesday, 14 January 2015

Department of Finance

European Central Bank

Photo of Colm KeaveneyColm Keaveney (Galway East, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

139. To ask the Minister for Finance in view of the significant role that inappropriately low set interest rates by the ECB played in the recent economic crisis here, causing an inappropriate positive output gap in the economy and being a consequence of the deficiency of the eurozone as an optimal currency area, the way he assesses the future risk of inappropriately set interest rates to the economy; the way that these risks may be addressed; the actions he has taken in that respect; and if he will make a statement on the matter. [49572/14]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The ECB sets policy interest rates having regard to inflation developments and prospects in the euro area as a whole, and not in respect of conditions in individual Member States.

It was clear at the outset that participation in monetary union would involve the loss of this policy instrument and that other stabilisation tools such as fiscal and incomes policies would assume greater importance in a currency union.  This is still the case.  Therefore, while euro area policy rates were not appropriate for Ireland during the bubble years, the onus was on other policies to stabilise the economy.

The Deputy makes reference to the deficiency of the euro area as an optimal currency area.  This deficiency relates to the fact not all Member States face economic shocks of the same magnitude or timing.  This can be addressed in a number of ways.  High degrees of labour mobility and policy discipline can help mitigate risks arising within a currency union.  In this regard, it is important to highlight that many reforms have taken place in recent years to improve economic governance and policy co-ordination in the euro area, which will ensure that the benefits of participation in the single currency are enhanced and that monetary union operates more efficiently.  The availability of firewalls in the form of the European Stability Mechanism and broader moves towards European banking union are also an important in this regard.

It is clear that, at present, policy interest rate setting in the euro area is beneficial for Ireland, with low rates helping to support both consumption and investment.  There remains, of course, the possibility that at some stage in the future the stance of monetary policy for the euro area as a whole becomes inappropriate for Ireland.  Ways to address this risk include improving financial regulation and undertaking structural reform to ensure that the economy can adapt appropriately.  Fiscal discipline with also be part of the response.  Other ways to reduce such risks include monitoring and guarding against the emergence of asset price bubbles.

Comments

No comments

Log in or join to post a public comment.