To What Extent Has Finance Been A Driver of Ireland’s Economic Success?

To What Extent Has Finance Been A Driver of Ireland’s Economic Success?

Embargo: Thursday December 21st 2006 at 00.01a.m.

Special Article in the ESRI's Quarterly Economic Commentary, Winter 2006

Patrick Honohan’s paper (adapted from a talk given at the recent Dublin Economic Workshop Conference in Kenmare) looks at the role of the financial sector in Ireland’s economic success.  

Despite evidence in other countries that large and efficient financial systems are key contributors to growth, few commentators have suggested that the Celtic Tiger had any special financial fuel in its tank.  

There have been notable successes, such as the export of financial services from the IFSC. And Ireland has been relatively free of the kinds of bank insolvency problems which have plagued many other countries at some time or another in recent decades. But the data do not show Ireland’s financial sector as standing out in terms of either scale or efficiency.

Nevertheless, the business sector and –indirectly -Irish mortgage borrowers have had access to global finance. Indeed, there has been a very rapid recent growth in foreign borrowing by banks to finance their mortgage lending. In the past few years banks borrowing from abroad to onlend to Irish residents has soared from 10 to 41 per cent of GDP.  

In the past, financial markets served a watchdog role, and penalized national overborrowing with high interest rates. But now that Ireland is in the eurozone, Honohan notes, the watchdog is muzzled and even high rates of borrowing can proceed without any warning sign from the markets.

For further Information contact:

Patrick Honohan on 01 4911562 or phonohan@eircom.net