Being part of the euro contributed some fuel to the fire but was not the reason for Ireland's boom and subsequent bust, Central Bank Governor Patrick Honohan has said.
In a wide-ranging speech at the INET annual conference in Paris on Thursday, Mr Honohan said claims that membership of the euro had led to the country’s downfall were unfounded.
He also said Ireland should consider introducing laws to deal with reckless bankers, as has happened in the UK.
Seeking to expose a number of myths around Ireland's bust, Mr Noonan said that contrary to popular opinion, it was not the euro that did it for Ireland.
“To be sure, the euro contributed some fuel to the fire in the form of low interest rates (that encouraged borrowing) and the removal of exchange risk on cross-border borrowing by Irish banks. But the euro was not an essential ingredient in the bubble,” he said.
“Nothing in the euro regime prevented Irish regulatory and fiscal policy from moderating this boom. When the crash came, the decision to guarantee the banks (flawed though it was in its design - blanket coverage and in the lack of prior consultation with partners) was underpinned by ECB liquidity support which prevented the chaotic currency depreciation which would surely have been the inevitable consequence had Ireland been outside the euro area,” he added.
Mr Honohan also said that while consideration should be given to enacting laws to deal with actions undertaken by reckless bankers, he felt that such actions did not amount to criminal activity.
“The Irish legislative framework deserves to be strengthened to take account of egregious recklessness in risk-taking by those who were in charge of failed financial firms. Recently the UK enacted legislation of this type which I believe could be usefully mirrored in Ireland,” he said.
“For the most part, unwise behaviour of bankers in the run-up to the Irish crisis appears to have been unwise rather than criminal,” he said.
Nonetheless, he said that it was partly true that lax supervision was to blame for Ireland’s problems and that “any attempt to assign responsibility must start with the banks.”
“With greater prudence by management and boards of the lending banks, this bubble could not have happened,” he said.
“In Ireland the scale of the bank credit expansion and the associated construction and housing price boom was of a different life-threatening order of magnitude. Credit expansion on such a scale should have rung alarm bells triggering much more intrusive examination of the vulnerabilities and corrective measures should have been introduced.
Mr Hononan also used his speech to dismiss suggestions that EU partner countries used Ireland's crisis to leverage policy changes in other areas damaging to the economy.
“Unfair issue linkage was certainly a danger for the Irish side in the negotiations. In the end, though, the danger was headed off, and the lenders did not attempt to force beggar-thy-neighbour policy changes in unrelated areas,” he said.
