Tuesday, 29 June 2010

Three weeks away

I have just com back to Ireland from three weeks abroad.

The trip included a weeks holiday in Italy, during which Finola and I visited the city of Bologna. This city is somewhere that may seem to pass through on their way to somewhere else, but I think it is well worth spending a few days there. One of the places we visited in Bologna was the basilica where St Dominic, founder of the Dominican Order is buried. But the entire centre of medieval Bologna is fascinating and the food is, of course, out of this world.

I also spent a day in Rome where I visited the basilica of San Clemente, which is built of the remains of two earlier churches which were excavated by a Longford born priest , Fr Mullooly , and is well worth seeing.

Before going to Italy, I spent time in Germany where I met Leo Dautzenberg, the Finance spokesman for the Christian Democrat party in the Bundestag. I also had briefings from the Irish Ambassador, Dan Mulhall and from senior figures in the Chancellors office and the Foreign Ministry.

Current arguments between Germany and other countries can only be understood if one understands German history in the 20th century. The inflation of the 1920s wiped out the German middle class. Families went from prosperity to penury in a matter of days. Just as Irish people have a horror of eviction dating from experiences in the 19th century, Germans have a horror of inflation. That is why they put such store on having a strong currency, and do not want to see countries solve their problems by printing more euros. As a people, Germans do not borrow much, and unlike Irish people , do not feel the need to borrow so as to buy their own homes.They are happy to rent.

I subsequently atttended a course in Stanford University in California for directors of public companies. One of the speakers was Mary Schapiro, Chairperson of the Securities and Exchange Commission.

Markets in shares in the United States have become much more complicated. Electronic trading has meant that shares can go up and down invalue by huge amounts ina matter of seconds. Big investors can hedge against losses to such an extent that voting shareholders in some cases might benefit from a fall in the value of the shares they own. All this makes life very difficult for the individual investor.

But a lot of the criticism of the “markets” is misplaced. Most players in the markets ultimately represent ordinary people through pension funds , insurance companies, and trusts. Their goal is to ensure that their clients do a bit better than everyone else. They would not be serving the interests of their clients well if they failed to take account of the possibility that stocks might fall in value, or that bond issuers might not be able to repay in full what they have borrowed.

I concluded my trip with a visit back to Washington DC. I was privileged to be invited to the 80th birthday of someone Finola and I got to know well during out 5 years in DC, Cardinal Theodore McCarrick. I also spoke at an event of the Atlantic Council.

Tuesday, 8 June 2010

Germany & Gaza and the best interests for Israel


I will be abroad for most of June and will not be posting material on the website as frequently as usual.

I will be in Germany next week and hope to find out a little more about the politics of a country that is pivotal to the future of Europe. The fall of the Iron Curtain has changed the security imperative of German politics. Germany now enjoys security to its east as well as to its west.

German reunification initially proved to be much more costly in financial terms than anticipated. The effort that this then called for, including wage restraint, pension reform and high savings, has now made the German economy much more competitive than its neighbours. The fall in the euro will help German exports as well.

But German society is ageing. This has created an anxiety about the future that has made Germans exceptionally reluctant to pledge their credit to help less well managed euro area countries to avoid defaulting on their debts. Of course German banks would suffer if there was a default and, in that sense, German credit to help Greece is being pledged to help out German banks too. This part of the argument has not got as much prominence in Germany.

In a sense Germany needs to reach a new understanding with the rest of Europe, one that it can show is in its interests and those of other EU countries. That will require a lot of imaginative thought. It will also require other EU countries to get a better understanding of German anxieties and to stop lecturing Germany.


The Israeli blockade of Gaza is deservedly coming under international scrutiny at last.

I do not believe that Israel and its allies have been pursuing policies that are in Israel’s interests for some time now.

Israel needs to negotiate its borders with its neighbours sooner rather than later. The high birth rates in surrounding countries and the looming US fiscal deficits suggest that the balance of power in Israel’s region is not moving in its favour over the longer term. Israel is the only nuclear weapons state in the Middle East which gives it significant negotiating strength at the present time.

Therefore Israel should want to bed down a deal while it is still in a strong position. Yet it is doing the opposite.

It refused to recognise, or speak to, the party that won the Palestinian election and was supported in this by the United States and the European Union. The bona fides of the party the Palestinian voters had chosen should have been tested ,at least for a period ,before setting politically impossible conditions for them.

One has the sense that its present indirect “talks” with the Palestinian Authority are just that , talks, rather than serious negotiations toward a deal.

The blockade of Gaza is such that Israel, and its ally Egypt, are still legally occupying Gaza under international law. Under international law, an occupying power has an obligation to provide for the people under its occupation. Israel, far from providing for the people of Gaza, is preventing others from doing so. In a way, the provision of such limited aid as does get through, facilitates the Israeli occupation by allowing it to avoid some of its humanitarian obligations as the occupying power.

Israel would probably prefer that it negotiate boundaries with neighbouring Arab states and let them take over the Palestinians. But Israeli policies have helped to create a strong sense of Palestinian nationality and that solution is no longer possible. Israel needs to come to terms with the Palestinian people as they are now, not as it wishes them to be at some future time.

I believe the European Union has shown little or no leadership on this issue. It has left everything to the United States. In so doing, it has failed Israel and its future, because it is in Israel’s long term interests that its present short sighted electorate and Government be pushed to make a final settlement with its neighbours now, not in 30 years time, when the terms

Thursday, 3 June 2010

Financial Services in Ireland


I am looking forward to helping the international financial services industry in Ireland make an even greater impact on job creation in this country, when I take up my role as Chairman of IFSC Ireland in September. In the meantime, I am reading and listening.

The industry already provides about 25000 jobs directly in banking, funds management and insurance, and supports many more jobs indirectly in back up services like accounting, law, and hospitality.

Wholesale financial intermediation creates about 7% of the GDP in Ireland as against 2% on average throughout the EU, and 4.5% in Britain.

About 10% of all EU funds under management , are managed here in Ireland ,a country with only 1.4% % of the EU’s GDP.

This is a highly competitive industry. Modern communications mean that these services can be provided in any number of places or time zones. They will continue to be provided in increasing quantity in Ireland but only if Ireland continues to offer a top quality financial, social and regulatory environment. This is a people based industry, so a supply of well educated and motivated young people, who want to work in Ireland ,is crucial.

A key figure in the industry, Willie Slattery, pointed out last weekend that the economic downturn has had a side effect of making Ireland more competitive because it has led to a significant reduction in relative labour , office accommodation, and other costs in the past two years. The reduction in housing costs will also have helped in attracting staff here from overseas.

I believe it is critical that Ireland have a reputation as a thorough, rigorous, and pragmatic regulator of the industry. These three characteristics complement one another. Nothing is to be gained either by laxity or rigid formalism. At the end of the day, it is all about winning and holding trust, and in that there is no divergence of interest between regulator and regulated.


The success of the endeavour depends very much on Europe’s success in restoring economic growth. The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis the emerging economies of China, India, Brazil and others over the past twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the eventual cost of ageing societies, and the ephemeral nature of some of the innovations of the so called “new economy”.

The boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European countries is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private, capital and labour, tangible and intangible. We need a new way of thinking , an enhanced orientation towards finding ways to earn a living from meeting the needs of the rest of the world.


As many of you will know, I am a strong believer in the European Union, the world’s only historical example of an entirely voluntary, and democratically sanctioned, pooling of sovereignty between different nations, many of whom were at war with one another in living memory. No other part of sthe world has attempted anything as ambitious, or as successful as the European Union.

I know that there is not a little concern at the difficulties of the euro and complaints that the EU’s policy makers have been slow in rectifying what may be seen as substantial omissions in the original design of European Monetary Union.

But all of this should be kept in proportion. In January 2001, the euro was worth 92 US cents. It subsequently rose as high as $1.59, thereby affecting euro zone exports as anyone living along the border with Northern Ireland can confirm. It has recently fallen back from that to a lower, and perhaps more sustainable, level. But that is a level well above where it was in 2001.

The arguments that are now taking place in the EU now about bail outs, about surveillance of national budgets, ECB bond purchases, about supposedly pro cyclical budget cutting, about moral hazard, about the need to devise a workable resolution mechanism for large but insolvent entities, and about the exact amount solidarity which member states of the euro owes one another, are all real arguments, concerning real choices ,on which there are legitimate grounds for disagreement . There is nothing wrong with the fact that there are vigorous arguments between countries about these issues at EU level, just as there are at national level. That is normal politics.

The criticism of the EU that has the greatest validity, in my view, is that it has waited for foreseeable problems to become acute before tackling them.

It is not so much the EU’s decisiveness, as its foresight, that has been open to criticism.

It was foreseeable that the combination of a single centralised monetary policy, with divergent and decentralised fiscal policies would create contradictions.

We must not make the same mistake again. We must show foresight, and intellectual rigour, in regard to the problems looming on the horizon.


There is one matter affecting the euro, and the solidity of the European economy generally, on which foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed closer fiscal policy integration in the euro zone is compatible with the German Basic Law or constitution. For understandable historical reasons, German Courts take democratic norms and the sovereignty of the people very seriously.

Issues that may be at stake before the German Constitutional Court are whether

1. The increased EU surveillance of the German budget, or

2. The large new German contribution to the special vehicle being set up to help euro member states with funding difficulties,

run afoul of the German constitution or Basic Law. It is important for markets ,and for the economic stability of Europe and the world ,that the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.

The Court has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a preview of its thinking. It emphasised its belief that the sovereign state is still the main vehicle presently available for democratic governance.


It said then that “an increase in integration(in the EU) can be unconstitutional (in Germany)l if the level of democratic legitimation (in the EU) is not commensurate to the extent and weight of the supranational power or rule” at EU level

And it has added that, for it, the test of democratic legitimation is whether “the allocation of the highest ranking political offices” takes place by means of “competition of Government and opposition” in a free and equal election . Essentially the question it posed was ..can the people vote the EU government out of office? Even though the European Parliament is directly elected, it not believe that the EU yet passed that democratic test. And they are right, the people of the EU do not have an opportunity to vote the EU government out of office.

The Court was therefore very reluctant to agree to further EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in democratic governance at EU level. Otherwise it favoured keeping power at the level of the states because it argued that the states of the EU have a more developed democratic practice than the EU does ,at the moment.

I am certain this issue of whether there is sufficient democracy at EU level will arise again in any appeal to the Court against the proposed closer integration of Germany in responsibilities to, and for, the rest of the euro. Such an appeal will take place and has the potential to destabilise financial markets unless something is done to forestall the problem.

I have long advocated a simple remedy to this problem.


The Stability and Growth Pact, governing the euro, was finalised at the Dublin Summit of 1996 during the Irish Presidency. During that same Presidency, I commissioned a study on the possible direct election of the President of the European Commission by the people of Europe in a free and equal election of the people of the EU.

I really do not believe that it would be wise for EU leaders to sit and wait to see what the German Court might say . Its jurisprudence is already published in its judgement on the Lisbon Treaty.

That judgement should now be studied carefully, and urgently, by The European Council, the Commission ,and the Eurogroup.

The European Union must further improve democracy at EU level, to an extent that would make whatever further EU integration is necessary to underpin the euro, acceptable to the German Constitutional Court. It is as simple as that.

This could, for example, be achieved by providing for a electoral competition, among all the people of the EU, for the posts of highest ranking political actors in the EU.

The European Council could decide, without changing the Lisbon Treaty, that in future it will only nominate as President of the European Commission, as President of the European Council, and/or as President of the Eurogroup, a person who has won a majority of votes in an EU wide election for that post, held on the same day as the European Parliament election.

That would create a similar level of democracy at European level to that we each enjoy at national level.

Finally, the idea of a direct EU wide direct election is not as radical as it might seem. In December 2002, the Laeken European Council specifically asked the European Convention to examine this matter, but that never happened . All the emphasis was put on increasing the powers of the European Parliament, but direct election of a President by people themselves was never seriously considered. Nor was any change in the electoral system to the European Parliament itself.

The present crisis is an opportunity ,not only to deal with long hidden fiscal problems, it is also an opportunity to make the European Union even more democratic.

Speech by John Bruton, former Taoiseach, at the Annual lunch of the Federation of International Banks in Ireland on Wednesday the 2nd June at 12.50 pm in the Westin Hotel, Dublin