Transcript of Governor Gabriel Makhlouf’s interview with Ian Guider, Markets Editor, Business Post

13 April 2020 Interview

Governor Gabriel Makhlouf

Ian Guider: I was looking through some of the research put out by the Central Bank last week - the Quarterly Bulletin and the scenarios it outlines. Are you getting a sense that, given how long the restrictions are likely to last, we are going to see a more severe shock than perhaps the more benign scenarios present?

Governor Makhlouf: One of the extraordinary things we’re facing right now, and this in the Quarterly Bulletin, is that the path of the economy will depend on the path of the virus both globally and domestically. And at the end of the day, we don’t know how long this will last. We are all hopeful that we’ll see peaks. It was good to see that the city of Wuhan has opened overnight – I think it was shut down in January, so that’s three months of complete shutdown. I think this will end but the key answer to your question is how long that will be.

I have to say that my own view for a while has been that we’re more likely to have more severe scenarios than people have been talking about. In mid-February I gave a speech at the European Financial Forum when I said two of the shorter-term risks to the economy were this virus and the UK’s withdrawal from the EU. At the time – this is probably about 12th February, so in other words less than two months ago – we could see the virus having an economic impact but that’s because it was China. And China being such a huge part of the global economy, it was bound to, as I said in that speech, have both a direct and indirect effect on Ireland. Within no time we then found ourselves with the virus spreading to Europe and the circumstances that we’re all familiar with right now.

I’m not a believer in the V-shaped recovery that people have been talking about, so the notion that at the end of the quarter we’ll be able to lift all the containment measures, and everything will go back to normal, I think is unlikely and certainly isn’t a basis for planning. For me it’s a Nike swoosh [Nike’s tick-shaped logo]. I think we’re going to go down and then it’ll be a gradual recovery. But I can’t predict how gradual it’s going to be. The fact that China is back online is a positive sign. I think it is a positive sign. But the fact that the United States is now, I think it’s now leading the world [in relation to the health crisis], the impact of this is a bad sign for the world but also for our economy. So, under virtually any measure or criterion, I think we’ll see something that is very severe, and we should all be planning accordingly.

To be fair to everybody involved, we are all taking this incredibly seriously. Obviously it is a health crisis first and foremost. Supporting the frontline of the health response, whether it’s through government financial support or through the community as a whole supporting it, that’s where people are taking this incredibly seriously. And the financial authorities, the Central Bank and Europe, I think we are responding.

Ian Guider: Focusing on the domestic economy, before moving to the European side – as you said, this is primarily a health crisis, but it is quickly becoming an economic crisis. The response over the last four to five weeks, is it adequate so far and what needs to happen next?

Governor Makhlouf: My gut feeling is that it is adequate. We are working in extreme uncertainty so all of us are making decisions based on what we know. Occasionally, within a few days, what we know changes and the important thing is to be ready to change in line with the facts.

As I said earlier, this is going to be temporary and the trouble is we don’t know what temporary means. But it is going to be temporary. I think a focus on supporting that connection between employer and employee, which the government has put in place, is very important so that the adjustment when the recovery comes will be as smooth as possible. You can debate whether or not the wage subsidy should be more, but I think they’re the right things to do. The actions of the ECB to inject liquidity into the system and to enable the banks to have the capacity to create credit, I think, were necessary and I think they’re sizeable.

It’s actually just less than a month since I was in Frankfurt and we made a decision to introduce an asset purchase programme to add to our programme of €120bn. That announcement, which we made on 12th March, within a week we had produced the PEP programme and €750 billion and that’s because in less than a week the facts had changed and we responded accordingly. I think the banks within Ireland have responded quickly themselves. Again, when we made that announcement on 12th March in Frankfurt, I think it was the following day or that evening that the schools were closed in Ireland. Within a week we had sat down with the banks, with the BPFI, with the Chief Executives of the big retail banks and others, and discussed the crisis and the immediate response to it – which of course were the mortgage payment rates that were put in place. From memory, I think, we issued a statement on 18th March. So things have moved incredibly quickly. My sense now is that we’ve responded well; the whole community and the institutions within it.

We need to be very vigilant about what’s happening, what the latest developments are, what else we might need to do, and the key thing is to have the agility to be able to respond quickly to events and to be decisive. My sense at the moment is that within Ireland we have done that. I think the European Central Bank has done that. I think more could be done in Europe, but we can talk about that separately.

Ian Guider: As you said, the ECB has moved. If I look at some of the measures also implemented by some governments unilaterally - providing liquidity schemes, providing additional finance – we’ve not yet seen that in Ireland. Speaking to the business community and some of the commentators within the business organisations and their lobby groups, it would seem that many people are disappointed that we’ve not seen that so far. Do you think we should have additional credit guarantees and liquidity support by the government?

Governor Makhlouf: I think credit guarantee schemes for small businesses in particular, and microbusinesses as well, I think that is definitely worth looking at. The one bit of caution I would put around that is it needs to be well targeted. I think it needs to be well designed. As you know, in Ireland we don’t have a policy positive view of state guarantees.

Ian Guider: No.

Governor Makhlouf: But I think there is a place for them, and certainly we have been doing work on how you would design a guarantee, and we’ve been talking to our colleagues across government on that. So I don’t think this is something that is not being looked at. It is being considered. And I suspect it does have a place in the response, yes.

Ian Guider: The Irish banks entered into this crisis still dealing with some of the issues of the past. Are you confident that they are able to withstand this type of shock?

Governor Makhlouf: Yes, I am, although with the caveat – with which I have to preface almost anything I say – that I don’t know how long this shock will last. But I think the biggest, probably the most important thing of all, that is worth bearing in mind is that since the last crisis we have spent a lot of time, a lot of effort building up resilience. By “we” I mean the Central Bank, and I mean the community and I mean at large and I mean households and I mean the bank and the state. Building up resilience of the financial system to shocks. So the state has reduced its debts and created better buffers than it’s had. The banks themselves are in much better position than they were at the beginning of the previous crisis and households actually are in a better position than they were in the previous crisis. So we are in a better position all round.

And again, another important difference between this crisis and the last one is the last crisis was a financial crisis. The financial system basically was at the heart of the problems we had last time. The financial system is not at the heart of the problems we have now. Now we’ve got a health crisis that has caused an economic crisis and the financial system I think has got the resilience to both manage the crisis and, if we do this well and do this right, actually be in a position to support the recovery when it comes. That’s one of the things the Central Bank and my team and I are thinking about quite carefully, which is making sure that the financial system as a whole, the banks and all the other players in it, can manage through this crisis, can support households and consumers through this crisis and still be in a position to support business and provide credit, which will be necessary for the recovery.

Ian Guider: Does the crisis not spill over into the banks however, when you have so many people unemployed, we are probably going to see an increase in non-performing loans; that some businesses will not be able to restart. Obviously the actions of the European Central Bank mean that interest rates are going to be lower for so much longer that the ability of banks to withstand an economic crisis may not be there for that much longer?

Governor Makhlouf: I think the banks are actually in a better position than what your question implies, partly but mainly I suppose because of all the work that’s been done by them and by the Central Bank and by the European authorities over the last ten years to get them into this position. Secondly, I think the system is coming together, whether it’s at national level or European level, with eyes wide open around the risks to the financial system. So we’re being very careful, for example, about the whole issue of when do loans become non-performing. So, loans that are officially non-performing have all sorts of implications for the banks and their ratings and their capital needs, et cetera. Where we know that there’s a mortgage break because of COVID-19, we’re avoiding – we’re trying to avoid anyway right now, the risk that those will be treated as non-performing. And that’s been pretty straightforward to achieve in the short-term. Obviously if the crisis continues for much longer, that will throw up a different set of issues for us.

Ian Guider: Yes, what happens after the initial forbearance period of three months? Are you working on plans to extend that out further if we needed to go to the end of the third quarter of the year, even to the end of the year or would you be prepared?

Governor Makhlouf: The short answer is we’re working both with the banks and the authorities in Europe, the EBA and others, on precisely that issue. So we have not lost sight of it. We don’t have an answer right now.

Ian Guider: Yesterday the Central Bank put out its statement and again you talked about the amount of credit that will be available by releasing the countercyclical capital buffer and various other things. Obviously in a situation like this, there may be many banks tempted not to lend to small business customers out there who are experiencing a short-term difficulty. How can you encourage banks to make that working capital, make loans, available and that they are not deciding themselves which businesses are viable and not viable?

Governor Makhlouf: There’s probably two or three ways, I think, in response to that. Firstly the actual terms on which the liquidity that’s been put into the system, they’re actually quite favourable if the money is lent. So the ECB’s targeted operations, I mean the word targeted is in the title because it’s really about lending to the real economy, lending to businesses and on very favourable terms, so you put all the incentives into that. Secondly, I think it is the dialogue that we and others are having with the banks to make sure that they are very clear on our expectations. Thirdly, or maybe this is part of the second one, I think banks – this is the Irish banks – partly because of what they went through over the last decade, I think they are going into this crisis in full knowledge that they need to play their part to support the community and the business community in particular. Just to repeat a little what I said earlier, it is in their interests to support people through this crisis who have just been impacted because of the containment measures. And because they are going to be their customers after the crisis as they are their customers now.

Now of course, of course, there will be businesses that fail as a result of this crisis. I think that is almost inevitable that that will happen but part of what we’re trying to do and what the banks are trying to do, what the government’s trying to do, is to make sure that that happens in the least amount, to the least extent possible. The big question here is the unknown of how long will this crisis last. But in the engagement we’ve had with the banks over the last few weeks, I think they’re very, very seized on the issues that the country faces and of their role in helping the country manage this.

Ian Guider: The same could not be said for the insurance industry, Governor.

Governor Makhlouf: I understand why you say that and certainly we’ve spoken to the industry and we’ve made very clear that where contracts are unclear, then the industry should take the consumers and their customers, and give the consumer the benefit of the doubt. Obviously, you know, at the end of the day you need to have had a valid insurance contract for the type of claim that you want to make but I completely understand why people may say the insurance industry is not responding in the same way as the banks. And I think the insurance industry should reflect on why people are saying that.

Ian Guider: Does it require more than moral persuasion to them? The Central Bank is a very powerful organisation, you’ve got a lot of regulatory powers through the Consumer Protection Acts and various other pieces of legislation. Do you need to start wielding a little bit more stick with the insurance sector right now?

Governor Makhlouf: I think it’s a complex area because a lot of this does boil down to what sort of contracts have customers entered into with insurance companies, because at the end of the day if people haven’t taken out a particular insurance, there’s no obligation on the insurer to pay out for something that’s not been insured. But we’ve made very clear, and I think the letter we wrote to the chief executives of insurance companies – which is published on our website – made very clear what we expect from them, as their regulator. We expect them to follow through with what we said. I wouldn’t like to say much more than that at this stage other than to repeat what I said earlier, which is that when people like you and others say that the insurance industry is not reacting in the same way as the banks, I think the chief executives in the insurance sector and the boards of our insurance companies should reflect on that.

Ian Guider: But for customers out there who have taken out policies in good faith, the best they can hope for is that the power of public naming and shaming is the best rather than a remedy in regulation or law.

Governor Makhlouf: Well, if they’ve taken out a policy that gives them cover for loss of business, they should, you know, it’s a valid claim, they should expect to get it paid out. And we have said to the sector, as I said, that if it’s unclear, they should read the policy in the consumer’s interests. Now, if you had not taken out a policy then I don’t think you can really expect – sorry, if you haven’t taken out a valid policy, I don’t think you can expect to then get a payout from an insurance company. You should be absolutely entitled to expect, if you’d taken out a policy to cover you for the particular issue, that you should get paid out and I expect in those circumstances, the sector to respond appropriately.

Ian Guider: Just before moving on to the European response, can I ask you just about the rest of the financial system? Obviously we’ve had several months now of turmoil in financial markets, we spoke about the banking sector – are there any wider concerns for the Irish financial system given the level of funds here, given the property sector here, are you concerned or are you paying attention to wider dislocation in the market here?

Governor Makhlouf: Yes, we’re paying a lot of attention to the fund sector in particular. You’ll probably already know that I signalled before Christmas, in a speech I gave in Waterford at the end of November, and then in my statement when we published the Financial Stability Review at the beginning of December, that market-based finance, non-bank financial intermediation had grown significantly in Ireland and deserved a lot of attention from us and was going to get a lot of attention from us. I announced the start of a deep dive into property funds in particular but my plan has always been that the deep dive into property funds was the first step into looking at funds more generally. So we have been looking extremely carefully at funds over the past few weeks, working with colleagues in Europe and naturally elsewhere to co-ordinate and share information and to make sure that stability was maintained to the extent that it could be maintained, and that a response was made to the extent a response could be made.

Some of the decisions that the ECB announced overnight were a direct response to sort of our interventions, working with colleagues across Europe, which we thought were needed to support and put in place a bit of – to address a little bit of the pressures we thought that we could see the fund sector suffering from. So, the immediate thing is to manage two issues really. The new one – well, the issue we’ve had the last four weeks – is to simply manage the impact of the crisis on funds and on volatility and we’ve seen that not just in Ireland, but in other markets, in London and in the US for example, and in France. And I think we’ve done that so far.

The second issue is the old issue, which is the size of the sector. The way it has grown, not just in Ireland to be fair but in the world, and to understand the risks that it poses to – from my perspective what I really want to understand are the risks that it poses to financial stability. We spent the last ten years building up the resilience of the banking sector to shocks and what I want to understand is how resilient do we think non-bank financial intermediation is to big shocks. In my view, and I said this in a speech in Berlin which now feels like ten years ago, but at the end of February I was in Berlin talking about … I think I said it at that speech, I may have said it somewhere else, I do think that we need to be looking. We’ve developed a macroprudential framework for the banking sector and in Ireland we’re pretty close to completing the toolkit, so we’ve got the countercyclical buffer which of course we reduced to zero a few weeks ago. The government has in principle said it’s going to give us the systemic risk buffer although not yet because right now obviously we don’t need it and we’ve got the other systemic, the OC buffer, so we’ve built a framework and we’ve obviously got the mortgage measures which apply to households and banks, we’ve built this framework very much focused on the banking sector. We do not have an equivalent framework for the non-bank sector and in my view that is the direction that we should probably be looking to move in. That was my view before the COVID-19 crisis and that’s still my view. It’s a very long answer to your question, Ian, but I think there’s a bunch of medium-term, longer-term questions which were around before the crisis and are still there. The other issues, the immediate ones, I think we’ve done a reasonable job so far to address them.

Ian Guider: In terms of the announcements by the ECB so far, do you think they’re actually having an effect right now on the European economy or do you think it needs to go back to governments and unleash their fiscal powers?

Governor Makhlouf: At the ECB, we said it in our 12th March statement, and as we said earlier, this is a health crisis which has caused an economic crisis. The response to it is first and foremost for governments to support the health system and to support the real economy. First and foremost it’s for governments and the role of monetary policy coming out of the ECB is to be supportive of those actions. So the decisions that we took on 12th March, the decisions that we took on 18th March, their prime focus was to be supportive of what governments were doing but they had a second objective; to make sure that markets were reassured and that we didn’t create, that we didn’t allow markets through their volatility and through the uncertainty that was around, we didn’t allow markets to actually create a financial crisis. And I think we have succeeded in that.

I do think that governments across Europe collectively need to do more. The response to this crisis could not be left to the ECB alone. You could argue that the 2008/9 crisis, because it was a financial crisis, was a crisis but ultimately it’s the Central Banks that solved it, obviously with the help of others, including regulators, governments’ regulator changes et cetera. But that crisis was for Central Banks to play a key role in solving. I think in this crisis it’s really for Central Banks to be supportive of government action and I think across Europe, definitely more can be done, and we’ve got the debate going on at European level as to how much extra support should be coming out of Europe and whether we should be using some particular instrument or other particular instrument. I’ve been very clear on this, which is that we do need an ambitious, co-ordinated, and urgent response from every EU country and every EU institution. Whether it’s a euro coronabond or whether it’s the European Stability Mechanism or whatever, I think the wellbeing of the European economy, not just through this crisis but coming out, to enable us to come out of the crisis well, does require everyone to play its part. My own view is that at a pan-European level, more can be done and should be done.

Ian Guider: Are the ECB favourable towards the coronabond proposal that’s been put out there?

Governor Makhlouf: I think the ECB itself hasn’t taken a position on it. A number of my governing council colleagues have come out and said they are supportive. I think the ECB itself will be fairly neutral on the coronabond.

Ian Guider: What’s your position on it?

Governor Makhlouf: My own is what I’ve just said, Ian, which is that I think some response is needed, whether it’s coronabond or whether it’s some other sort of bond or whether it’s use of the European Stability Mechanism or whether it’s something new that comes out from the European Commission. I think that there is a need for greater action at the European level. In many respects, whether it’s a coronabond isn’t particularly material. We just do need a response. From the ECB’s perspective, we stand ready to take action to support the citizens and economies of Europe and the actions we’ve taken so far have shown that. President Lagarde has made very clear that all options are under consideration and will be considered if events show that we need to do more.

Ian Guider: Is it disappointing that having come through the Greek crisis, having come through the sovereign debt crisis, that some of the European authorities are still not united in having the tools to resolve a crisis?

Governor Makhlouf: Yes, it is disappointing. To be fair, I don’t think anybody expected this crisis to happen as quickly as it did and to have the speed of impact that it’s had. We have over the last ten years actually built a very good response – or responses – to financial crises. One shouldn’t ignore the fact that a number of measures have been taken, a number of steps have been taken since 2009 to enable a much more effective action to happen across Europe. I just mentioned the European Stability Mechanism as an example. The ECB itself has taken a number of decisions to enable that to happen. I think what is disappointing is that at a political level, that that hasn’t also been, I think the Central Banks have actually gone further in terms of building links, connections, in ways to support the pan-European economy through the tools they’ve used, the policies they’ve adopted, the institutions they’ve set up. I think at a political level it’s much more patchy and it is disappointing that it is as patchy as it is.

Ian Guider: Does this pose a greater risk to Europe than Brexit, that we don’t seem to have unity at this time?

Governor Makhlouf: It certainly poses a risk, I think it depends – if you want to compare it to Brexit, I think Brexit depends on your standpoint. I mean the UK leaving the EU is still a very big deal for Ireland and it’s probably a bigger deal for Ireland than it is for some other countries in Europe. I do think one needs to be careful about jumping to conclusions too quickly about the risks to Europe of the crisis, this particular crisis. I’ve read quite a bit about that and I’ve seen some political comments about that from across the EU. We need to remember that we, the EU project, which is one that’s actually been pretty successful over the last 75 years or so, of course the EU itself isn’t that old but the post-Second World War ambition to come together and avoid repetition has been successful. And I think ultimately we still share that ambition as a community of Europeans. This crisis is obviously putting a lot of strain to it. Ultimately how we come out of this crisis and where Europe stands will depend on the quality of leadership that we see both in this crisis, but also leading us out of this crisis, and as a Central Banker, I just hope we get the best leadership possible.

Ian Guider: But in the space of a decade we’ve seen two crises and the response at political level is still punishing weaker countries. That’s hardly something that leads to a longer-term coming together of Europe when you have countries that are clearly suffering right now and not getting the help that they need.

Governor Makhlouf: I’m not sure I’d use the word ‘punishing’. I think people come from different traditions and different experiences. And those differences need to be appreciated. It’s part of the richness of what it means to be a European actually, but I think, ultimately the interests of all of us in Europe is to work together to solve the challenges that we’ve got. Right now we’ve got a big health crisis that we’re looking to solve. Once we’re through the health crisis and the containment measures can be relaxed and the economic recovery can start, it is in the interests of everybody in Europe that every economy in Europe actually gets back to normal and gets back to working well. It’s in the interests of the northern states of Europe to make sure that the southern states of Europe are successful. And I think it’s the job of political leaders to be able to explain to their communities why that’s the case.

I mean certainly Central Banks, you know, I personally will do my bit to explain to people why I think what I do and why I want to make the sorts of decisions that I want to make. So, it does boil down to leadership and, you know, ultimately the success of the European project so far through some very, very testing times, you can say well maybe … I mean, I look at this in an optimistic way. I look at what Europe has achieved and how Europe has gone through these crises, and I think well if it’s gone through these crises, it can achieve even more. You can take a different view. You can take a different view and say, well, you know, there are these crises and they can’t agree easily and therefore it’s a failure. That’s not a view I take; it’s not a perspective I take. And I like quoting Keynes quite a lot, Ian, and Keynes years and years and years ago talked about how if you always take a pessimistic – I paraphrase, if you always take a pessimistic position, you’ll drive yourself into the pit of want, but if you always take an optimistic position you’ll actually see it realised. And I do think that on the evidence of what Europeans have gone through, there’s no reason that they can’t go through this successfully.

Ian Guider: Are the ECB at the limit of what they can do?

Governor Makhlouf: I don’t think so. I don’t think so. But I do think that it is for the fiscal authorities, it is for governments to actually take action which we can then support. I don’t think we’ve reached the limits of what we can do but this will be much, much more, our actions will be much more effective and much more powerful if they are supportive of actions taken by governments. So, no, I don’t think we’ve reached the limits.

Ian Guider: Just to go back to the last interest rate meeting and the comments by President Lagarde, do you think the ECB’s initial response of this ‘we’re not here to narrow bond spread’; do you think that was a misstep that you’ve not been able to recover from so far?

Governor Makhlouf: Well certainly some people have taken it as a misstep. I, because I was in the discussions that preceded her saying that, I knew what she meant. But it was obviously interpreted by some people in the markets as meaning something else, which was never her intention. And she made clear very quickly what she did mean, so I think the actions of President Lagarde both in responding to that particular issue, particularly the following week in the announcement of the PEP package, but also her interactions with European leaders, have shown that she’s absolutely the right person to be leading the ECB right now. Her experience both as a finance minister in France and leader of the International Monetary Fund, I think she’s absolutely the right person to be leading the ECB.

Ian Guider: Has it cost the institution some of its credibility though compared to the previous president and his actions?

Governor Makhlouf: I don’t think so. I think the institution’s credibility ultimately rests on their actions, on its actions, and our actions were to basically put into the European economy €1 trillion worth of liquidity a few weeks ago on top of €3 trillion worth of financing operations. And the actions we made just overnight, published overnight in terms of easing collateral, and the statements we’ve made that we’ll take actions. It’s the actions that ultimately define the credibility of the institution. And the previous president faced a different set of crises. He was dealing with financial crisis and he managed the response to that financial crisis extremely well, and I think Christine Lagarde is in the middle of an economic crisis and I’m pretty sure she’s going to, she and the rest of the governing council, the other 24 of us, are also going to manage this particular crisis well and support governments in their actions to manage it well.

Ian Guider: The Eurozone didn’t enter 2020 in the greatest of economic health and given how severe this shock is, what kind of economy are we going to see in the next couple of years?  What kind of levels of unemployment are we going to have to persist with, what kind of levels of growth are we going to have – if any – and how long is this shock likely to last for citizens out there?

Governor Makhlouf: These are almost existential questions, Ian, but I think you’re right, the European – well, the global economy actually, entered 2020 in not the best condition. As the IMF said back in October-ish, what we’re facing is a synchronised slowdown – if I remember rightly, this was the way it was described. And the European economy is obviously affected by the global economy. I can’t put numbers on the extent of unemployment or the extent of growth, et cetera. I can point you to what we know about the Irish economy and no doubt we will be looking at similar scenarios or putting together similar scenarios for the European economy at the ECB in the next couple of months.

The impact on the global economy of China’s actions over the last three months has been significant. We’re now going to be going through something similar, with huge impact on unemployment in particular in the United States. So we are in recession territory. Undoubtedly we are in recession territory. Now, how long and how deep it will be, how long it will last, ultimately depends, as I said earlier, on the path of the virus. On the sort of scars this crisis actually leaves behind to firms, to households. And if I knew the answer to all that, I could answer your questions much more precisely. I think the key thing for all of us is to recognise that this should be a temporary crisis, notwithstanding the fact that we don’t know how long temporary will last. So we should do everything in our power to sustain the connection between firms and employees to enable recovery to happen faster. To help households through the current crisis and to make sure that we can recover globally and in Europe and in Ireland when the opportunity comes. Now, you know, one reason that the global economy wasn’t in best of health coming into 2020 was the fact that global trade tensions between – remember those?

Ian Guider: Seems a long time ago now.

Governor Makhlouf: They were quite a big story in the previous millennium. But those sorts of tensions have not gone away, they’ve just been overwhelmed by COVID-19. Now, in my view, restoring global trade, restoring the authority of the international rules-based order, restoring the effectiveness of the WTO system, reducing tariffs, all of those will support economic recovery. If those things are not addressed, then we’re going to be starting off the recovery from COVID-19 in a slightly weaker position than otherwise.

Ian Guider: Obviously this is going to have to be paid for at some point in time, all the measures, be it fiscal – the argument that perhaps austerity should be a thing of the past, are you somebody now that would think we may have got it wrong in the last crisis and should learn the lesson that this should not be paid for in the future by austerity?

Governor Makhlouf: You’ve asked me a number of different questions in that statement. I do think that the approach different countries took in response to the last crisis – I think the degree of austerity, to use that word, wasn’t necessarily appropriate or right. At the end of the day, what matters to any successful economy is to have a sound macroeconomic framework. It’s to have government debt in a sound position. There are a number of fundamentals that are needed. I think that when you look back at the previous crisis, I think in some countries some of the decisions that were taken probably went further than they needed to and probably hampered the recovery of those countries than they needed to. Now, looking forward, I think we’re in a different position. Certainly in Ireland we’re in a different position. What I said earlier – our households, the financial system, are obviously more resilient now than it was then. Household debt is in a better position than it was then, and the state’s position is much better than it was then, so it can sustain greater levels of debt. I think international investments and markets will continue to have confidence in the Irish economy.

The Irish economy before COVID-19 … yes, I was worrying before all this that we were an economy that was operating at its potential. And I was worrying about things like overheating. I was having conversations with some of my team about overheating and I was asking myself well, you know, if we want to ramp up construction activity in Ireland to address the housing problem, are we actually going to be able to do it? I was having those types of conversations.

Ian Guider: They were nice conversations to be having, I think, in the context of the current crisis.

Governor Makhlouf: Exactly. That wasn’t that long ago, and events have moved on completely. But what I’m saying is, I think we’re in a better position as a country to manage the challenges to come. So I don’t think we need, at the moment anyway, I don’t think we’re going to need to repeat the policies that we had to put in place back after the previous crisis. I think we are in a better position and international investors will continue to have confidence in our economy. Doesn’t mean there aren’t risks around. Some of the old risks that the Central Bank has been talking about continue to exist. If COVID-19 wasn’t here, I would still be flagging Brexit as a risk for us. I’d still be flagging our reliance on multinationals and what international tax reform might do to them. So, those are still around, but I don’t think at the moment, from what I see, that we need to; that we’re going to move into an austerity world like we did after the previous crisis.

Ian Guider: Are we likely to see long-term, regardless of how long this lasts, and even if it’s short-term, that there are going to be impacts, unemployment higher for longer – are there still going to be, even with the best-case scenario, a long-term impact on the economy and on people’s lives in terms of unemployment, in terms of debts? Is there still … there’s no good outcome here for people is there?

Governor Makhlouf: I think that’s too pessimistic actually, I think that’s too pessimistic. A lot depends on how long all this will last, what the path of the virus is, how long the containment measures last. As I said, I actually think we’re going to have a gradual recovery. But it will be a recovery. And as long as the sorts of measures that the government in Ireland and governments around Europe have put in place do their job, then people will get back to work, the economy will get back to functioning. Now, some firms will not but that doesn’t mean that their place won’t be taken by others in the way that economies normally work. That successful firms continue to succeed, and non-successful ones don’t. So, I think that would be a bit too pessimistic here, but it does depend on the extent of the length of this medical crisis, health crisis. Ultimately that’s where the focus needs to be. We need to make sure that the resources are provided, and the support is given to ensure that the health crisis is managed because the better and faster that we can manage the health crisis the better and faster the economy will recover.

And resilience is a key word here. We’ve built up resilience over the last decade across the country, across the economy, you know, the state’s finances, household finances, the banks themselves and that resilience right now is paying off. We’re enabling the banks to use some of their buffers to support the wider economy, as an example. We’re going to have to rebuild that resilience but there’s no reason why we can’t do it.

And then once we’re through COVID-19, we’ve got to think about those challenges that continue; that won’t have gone away. I’d talked about them in the past, what I called big economic transitions that we face: climate change, technology, demography, we talked about the financial system and funds. But these are big changes to the way our economy’s been working and they’re going to be here after COVID-19 has gone away. That’s why, from my position as Governor Makhlouf of the Central Bank, I’m very focused on managing the short-term, managing the crisis, but also at the same time planning for the medium-term, planning for the economic recovery that will come and planning for managing these big economic transitions that we have to think about.