Key Point

Ireland is a pioneer in the implementation of a carbon tax. This has allowed us to avoid (more) increases in income tax which would have further reduced disposable income, increased labour costs and destroyed jobs. It is also facilitating us in meeting our very demanding legally binding obligations to reduce greenhouse gas emissions, and provides support for the creation of new jobs in improving energy efficiency and growing the low carbon economy. We will continue to benefit economically and environmentally if we keep it in place, and increase the rate per tonne of from €20 to €25, as envisaged in the programme for government.

Context

Ireland was the first of the fiscally stressed countries in Europe to implement a carbon tax, which is now an important source of income for government, generated in a way that does not destroy jobs, and which at the same time helps us protect the environment and meet our legally binding greenhouse gas emission reduction obligations.

This achievement has become a focus of attention internationally, as an increasing number of countries struggle to find a path that increases government income and does good at the same time.

Many countries talk about introducing a carbon tax, but few do it. We did it, and it is important to keep it in place. In this commentary, I summarise the economic context, what we’ve done, and to what effect as regards government income and greenhouse gas emissions, and why we need to increase it. Notes that give more detail, including sources etc., are provided at the end.

Economic Crisis

The economy was in free-fall between 2008 and 2009 – GDP (real terms) fell from €166.80 billion in 2008 to €157.69 billion in 2009, a drop of over 5%. Since then GDP has stabilised – expected to be €159.7 billion in 2012.

Tax revenues went over an even deeper cliff, dropping from €40.78 billion in 2008 to €33.0 billion in 2009, a fall of over 23%. Since then tax take has increased; it is expected to rise to €36.4 billion in 2012 (but still well below 2008 levels). Most of the increase has been in income taxes, which rose from €13.2 billion in 2008 to €15.3 billion in 2012.

The Irish Carbon Tax

The carbon tax was first introduced in December 2009, to apply in 2010. In its design, it followed the recommendations of the Commission on Taxation which reported in 2009, of which I was a member. The key to progress was what we were not asked. We were not asked “Is a carbon tax a good idea?” We were told that the government had decided to implement a carbon tax – a key plank of the Green Party – and we were asked to advise as to how to do it. Most of our advice was taken.

The tax has the following features:

Coverage: In all European countries, climate change policy distinguishes between emissions that are in the European Union Emissions Trading Scheme (EU ETS) which sets a (declining) cap on greenhouse gas emissions from the power and heavy industry sectors, and the non-traded sectors, which comprise the rest of the economy (heat in households and business, transport, agriculture, waste). The Irish tax is on CO₂ emissions from the non-traded sectors (mainly transport and heat in buildings). The logic of applying the tax only to emissions from the non-trading sectors is that emitters in the trading sectors – who can buy and sell allowances – already confront a price for carbon.

Rate: €15 per tonne of CO₂, applied in 2010 and 2011, increased to €20 for 2012. The idea was that there would be a rough symmetry between the tax and the allowance price in the trading sectors – everyone would face roughly the same price and therefore the same incentive to reduce emissions.

Table 1. European Union Allowance (EUA) Price (trading sectors) and Carbon Tax (Non Trading Sectors), Ireland, 2008-2012

The price symmetry held in 2010 and 2011, but a wide gap emerged in 2012.

Revenue Yield: Roughly €100 million per €5 per tonne tax. Tax-take has risen from €246 million in 2010 to about €400 million in 2012. It will approach €500 million if the rate is raised to €25 per tonne.

Price Effects

Table 2. Impact of a €5 increment in tax, Ireland

Has it had any effect on greenhouse gas emissions from the non-trading sectors?

We have good data on transport, and in particular consumption of petrol and auto diesel.

Table 3. Transport Fuel Consumption, Ireland, 2008-2011

Consumption of petrol fell from 2310 million litres in 2008 to 1829 million litres in 2011 (fall of 21%)

Consumption of auto diesel fell from 2,960 million litres in 2008 to 2,563 million litres in 2011 (fall of 13%)

Considering that GDP over the same period ‘only’ fell by 5%, this reduction in motor fuel consumption is very striking. However, note that the drop was already underway from 2008 to 2009, before the tax came into effect. And there are complementary policies which have played a role. Ireland imposes a substantial tax on car purchase, called Vehicle Registration Tax (VRT) and an annual motor tax. In the past they were based on engine size. From July 2008 both of these were re-calibrated, based on open market selling price and CO₂ rating.

These had major effects on the composition of the new car fleet, shifting it dramatically towards low emitting vehicles. Ninety per cent of 90,000 new car sales in 2011 (down from 187,000 in 2007) were in the lowest carbon bands (A and B)

Issues and Analyses

Limitations of Data and Analysis

Correlation is not causation – beware the ‘Leacock’ effect…..With a very short time horizon, and very turbulent economic conditions and other policies (tax on new cars), it is difficult to draw definitive conclusions.

Stephen Leacock (early 20^th century writer and political scientist): When I state that my lectures were followed almost immediately by the Union of South Africa, the banana riots in Trinidad and the Turco-Italian war, I think the reader can form some opinion of their importance.

But we cannot reject the hypothesis that the carbon tax has had some effect in reducing emissions

We would expect the biggest environmental effect to be on the heat in buildings sector – because the price increase is 8-12 per cent, and there is a presumption that there are some low cost responses available. But the data are not yet readily available to track such effects

Limitations of Coverage

In terms of addressing total emissions from the non-traded sectors, its effects will be limited by the fact that it only applies to CO₂ emissions, while methane and nitrous oxide emissions from agriculture contribute about 50% of total emissions from the non-traded sectors, and are not taxed. Double income tax relief was provided to farmers in respect of their additional carbon tax liabilities for farm diesel from May 1, 2012.

For a combination of technical, leakage (with Northern Ireland) and political reasons, the carbon tax has yet to be applied to coal and peat, the most carbon intensive of all fossil fuels. This omission reduces the incentive to switch from peat and coal to woody biomass.

Limited Double Dividend Effect

The double dividend is garnered where tax is raised by charging for emissions (‘environmental bads’), and some or all of the revenue generated is used to reduce taxes on something good we want to foster, like jobs and employment, thereby stimulating the economy. “Taxer moins le travail, plus les pollutions ou les atteintes à la nature” (Tax work less, pollution or harm to nature more) so spoke François Hollande, President of France, on Sept 14, 2012.  The tax on CO₂ in 2012 will raise about €400 million, increasing to about €500 million in 2013 if the rate is increased to €25 per tonne.  This amounts to 3-3.5% of money raised from income tax. As such, it is by no means trivial, but it does not allow a major reduction in taxes on labour. But it does, (in the Irish case) help prevent increases.

Distributional Concerns

When the tax was introduced in December 2009, the Minister provided funding for complementary measures to support retrofitting of homes to improve energy efficiency, and there is also a subsidy for the fuel poor. However, the number of weeks for which the latter applies has been reduced from 32 to 26.

A group that would not be ‘picked up’ by these policies are the long distance commuters, especially to Dublin, who lack good access to effective and efficient public transport. These were identified in a report by an ESRI team as the most significant ‘losers’ of a carbon tax.

EU Policy

There is a revision to the Energy Tax Directive under consideration, which is likely to be finalised under the aegis of the Irish Presidency of the EU (January – June 2013). If this results in the setting minimum rates, they are likely to be well below the rates already applying in Ireland, but could bring peat and coal into the net.

A wide gap now exists between the carbon tax rate (€20) and the European Union Allowance price (EUA) of about €7 per tonne. This creates an incentive for consumers to ‘favour’ electricity over other sources, and as such will be economically inefficient.  The likely solution is that action will be taken at EU level to increase the allowance price by either shrinking the supply of allowances, or increasing  demand – e.g. by including transport in the EU ETS.

Why stick with the carbon tax, and indeed increase it to €25?

There are several reasons:

• The government desperately needs the money. Raising the extra €100 million or so that another €5 tax on CO₂ would raise will do far less damage to the economy that raising the same amount by an increase in income tax.
• Why is it better to increase charges for using the environment, instead of raising taxes on income? Increasing the tax on labour reduces the amount each worker has to spend on goods and services, and increases the cost of labour, so that employers are incentivised to move jobs offshore, or replace workers with machines. With a rise in your income tax, your income shrinks and you have no choice but to pay it. But with the carbon tax, you are faced with a rise in cost but you do have some choice as to how to adjust.
• It helps us all transition to a more sustainable and affordable world. Anyone who can possibly afford it now has very strong incentives to invest in insulating their house and (if they need a car) buying one that is super fuel efficient. If they can store wood (which is exempt from the carbon tax), they have an incentive to switch from oil or natural gas, which are taxed. As energy costs rise, such investments will pay off in more affordable mobility and more comfortable housing.
• And the tax encourages innovation. Sean O’Sullivan showed how crowd sourcing could help solve the problems of the long distance commuter
• A charge on environmental ‘bads’ improves the quality of our environment, which improves the quality of our lives.
• It means that we more easily and less expensively meet legally binding environmental obligations and avoid the costs (including fines) and reputational loss of being in the European Court.
• To the extent that we play a part in making the transition to a world less threatened by climate change, we also support our grand-children in limiting their exposure to the turbulence of climate change.
• It makes us less dependent on imports, and less vulnerable to potential interruption in the event of war or other supply-interrupting turbulence.
• It creates jobs as we invest in making our buildings, heating systems and boilers more energy efficient, and as we switch to locally grown wood as a source of heat.

Taxes are never popular. Edmund Burke’s familiar “To tax and to please, no more than to love and be wise, is not given to men” still rings true. But some taxes are less bad than others.

‘Dying must  be very hard,’ a friend said to Flaubert, ‘It is’ he responded, ‘but not half so hard as writing a novel.’ Taxing is always hard, but we can reduce the pain by taxing smartly.

Notes

1. I am grateful to Cormac O’Sullivan of publicpolicy.ie for accessing data on GDP, income tax etc. from sources below:

GDP and income tax data comes from the National Accounts (current price) and constant price -the forecast for 2012 was taken from the ESRI’s QEC (Quarterly Economic Commentary)
Tax data comes from the exchequer returns  and the 2012 figures are based on Finances’ tax profile for 2012 (2012 revised tax profile)

2. Report of the Commission on Taxation 2009 is available here:

 The details of the analysis and recommendations on the carbon tax are in Section 9.

3. Emissions from the traded sectors

I am grateful to Eimear Cotter (EPA) and Luke Redmond (UCD) for assistance here.

Pricing Carbon, Cambridge University Press 2010 (Ellerman, Convery and De Perthuis) is a good source on EU ETS and its performance in the pilot phase

4. Greenhouse gas emissions from non-traded sectors

Some data sourced from Ireland’s GHG Emissions Projections 2011-2020, EPA, April 2012 (Table A and B, pp. 22, 23) Available here

I am grateful to Eimear Cotter (EPA) and Luke Redmond (UCD) for assistance in accessing data

The consumption of petrol and auto diesel is taken from a very useful paper by Eric Gargan, Fiscal Policy Division, Department of Finance. See especially Slide 16 (‘Revenue Yields and consumption trends’) in ‘Reflections on the Implementation of the carbon tax in Ireland, presented at UCD/NESC Climate Change workshop, 16 May 2012. All the papers presented at this conference are available here.

5. President Hollande and the Double Dividend

I am grateful to Aldo Ravazzi for drawing my attention to this.

The link to the French president’s thinking is: “L’écologie n’est pas une punition, c’est ce qui doit nous permettre d’être plus forts ensemble. Dès lors, il nous faudra changer des modes de prélèvement et surtout peser sur les choix, taxer moins le travail, plus les pollutions ou les atteintes à la nature; dissuader les mauvais comportements ; encourager les innovations ; stimuler les recherches ; accélérer les mutations.”

François Hollande, ouverture de la conférence environnementale, 14 septembre 2012, page 5 line 5

6. Distributional effects of an Irish carbon tax

These are mapped by Callan, T., Lyons, S., Scott, S. and Tol, R. 2009. The distributional impacts of a carbon tax in Ireland. Energy Policy, 37, 2, 407-412.

7. Innovation

Sean O’Sullivan  “Revolutionary Mobility: Collaborative Consumption and Connected Computing – Crowdsourcing the Public transit Network” presented at the UCD-NESC workshop 16 May, 2012. Available here.

8. Edmund Burke on Taxation

From a speech by Edmund Burke on American taxation in 1774. The full speech is available here.

To download the pdf version of this blog -click here.

Key Point

We weigh losses far more heavily than equivalent gains, and we infer the general from the particular, rather than induce the particular from the general. These and many other features of our behaviour are elegantly documented in Thinking, Fast and Slow, authored by Nobel Prize winning Daniel Kahneman. In addition to loss aversion, he identifies the halo effect, anchoring, luck, the planning fallacy, optimism bias, the endowment effect and many other features characterising how we behave. They have considerable value as explanations as to how we got into such economic disarray, and provide some pointers as to how to frame the process of making progress. In this commentary, I summarise a few of the key insights, and their relevance to our situation in Ireland.

Context

Daniel Kahneman is a psychologist who in 2002 won the Nobel Memorial Prize in Economic Sciences for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. He is regarded as the father of behavioural economics. He has recently written a best-selling book – Thinking, Fast and Slow – which operates at two levels; it is a beautiful thank you, tribute and farewell to his late friend and long-time collaborator Amos Tversky, who died in 1996, and a very elegant and accessible pulling together of insights from a lifetime’s work, both his own and that of other leading contributors to the field. He points us towards how to avoid the sin of intellectual sloth – drawing the ‘obvious’ but wrong conclusion based in intuition and whatever information is available. He argues that we draw conclusions about the general from the specific, when we should instead derive conclusions about individual cases from categories and ensembles. Ignorance is bliss; knowing little makes it easier to fit everything you know into a coherent pattern. “The emotional tail wags the rational dog.” (quoting Jonathan Jaidt), and makes the point that those who avoid the sin of intellectual sloth could be called ‘engaged.’ “They are more alert, more intellectually active, less willing to be satisfied with superficially attractive answers, more sceptical about their intuitions. The psychologist Keith Stanovich would call them more rational.” (p. 46).

Many governments, including Ireland’s, are facing the unwelcome challenge of increasing taxes and reducing expenditure. Kahneman’s work addressing how most of us react to challenges and make decisions provides useful pointers that both explain the nature of the challenge, and how to make progress. Below, I summarise some of his key insights, and conclude with some implications. For the points made below, Kahneman provides evidence linked to peer-reviewed literature. The page numbers used for direct quotations refer to the Penguin 2012 edition of his book.

Key Insights and Evidence

Loss Aversion, Endowment Effect and Anchoring

We put far more weight on the prospect of a loss than an equal probability of a gain. Most of us will not accept a coin toss with an equal chance of winning or losing $100. We become more open to the offer when heads will give us €200, tails a loss of €100. Golfers – even Tiger Woods –try harder to avoid a bogey (loss aversion) that when putting for a birdie. Related to this is the endowment effect, whereby the reference point is what we now hold. He notes that it is well known in wage negotiations that the current wage is the reference point, from which negotiations are expected to proceed; preventing decline is far more important than achieving a rise. The concession you make to me are my gains, but they are your losses; they cause you more pain than they give me pleasure. Anchoring is a where the number on the table becomes the basis for the negotiation, hence the importance of ‘guide prices’ in house sales. [He argues that if awards for injury were capped at €1 million, the size of all awards will over time drift up to this reference amount]

We can see all of these phenomena at work in Ireland’s fiscal adjustment. One example: Incumbent teachers and other permanent civil servants (who are well represented by unions in negotiations) have lost much less in terms of salary and conditions than new entrants (whose interests are not well represented and who did not have a reference income). Aversion to loss can be mitigated by inflation; the money illusion allows us to be more accepting of de facto losses in real (net of inflation) income; this was an important feature of Ireland’s last fiscal adjustment in the 1980s. On May 31st 2012, the Irish public voted in a referendum to support ratification of the EU “Fiscal Stability Treaty”. In terms of engendering support, the campaign advocating ratification did not get traction until it began to emphasise what would or could be lost if we did not ratify. Pointing out the benefits of ratification generated little engagement; but once the perception of potential losses of not ratifying began to lodge in the public consciousness, the momentum in favour of approval began to grow.

Optimism Bias, the Planning Fallacy and the Sunk Cost Fallacy

He makes the case that most of us think we are smarter and more likely to succeed that we are. Psychologists have confirmed that most people genuinely believe that they are superior to most others on most desirable traits. At a personal level it is a blessing. Optimists are normally cheerful and happy, and therefore popular; they are resilient in adapting to failures and hardships, their chances of clinical depression are reduced, their immune system is stronger, they take better care of their health, they feel healthier that others and are in fact likely to live longer. He notes (pp. 253, 255, 256):

“The main benefit of optimism is resilience in the face of setbacks….the optimistic style involves taking credit for successes but little blame for failures…… Optimistic individuals play a disproportionate role in shaping our lives. Their decisions make a difference; they are the inventors, the entrepreneurs, the political and military leaders – not average people…..the optimistic bias plays a role – sometimes the dominant role-whenever individuals or institutions voluntarily take on significant risks; it probably contributes to an explanation of why people litigate, why they start wars, and why they open small businesses” And as such of course they can be very destructive. Politicians and generals promise the troops that they will be “home before Christmas” as they start wars they always imagine will be easily won, and bankers deride the naysayers: “It is time to shout stop. The tide of regulation has gone far enough. We should be proud of our success, not suspicious of it” (Sean Fitzpatrick, CEO, Anglo Irish Bank, 21 June 2007)

Related to this optimism bias is the planning fallacy and wishful thinking

The planning fallacy describes plans and forecasts that are unrealistically close to best case scenarios. This happens for many reasons: Statistics from the reference class – the population of similar projects nationally and internationally that could be interrogated to inform estimates – are not systematically collected, insufficient effort goes into detailed estimation of costs and plans, expensive changes are then made mid -stream, costs are deliberately under estimated to secure approval, the role of luck is ignored, there is an illusion of control, and plans of competitors, and what we do not know, are neglected. Kahneman cites the new Parliament building in Edinburgh – where costs went from the estimate in 1997 of £40 million to an out-turn in 2004 of £431 million – as an interesting example of the planning fallacy in action. The sunk cost fallacy is where additional resources are allocated to an existing activity or project, when better choices are available. It is often driven by ego, embarrassment and unwillingness to admit defeat.

Ireland is an interesting case study of the optimism bias in action across all leadership classes. The planning fallacy applied to major one-off projects (e.g. light rail, Dublin Port tunnel) but not where there was a high volume of projects referenced to international norms (national schools, motorways) where there was also ‘learning by doing.’ There were many examples of the sunk cost fallacy, including electronic voting machines which were not popular, but were persisted with beyond what was rational.

Adjusting for the optimism bias and planning fallacy involves: collecting credible data on the reference class, creating realistic scenarios that include encountering seriously bad luck, and conducting what Kahneman calls a ‘premortem’ – a thorough review before decisions are made that legitimizes doubts.

The Halo Effect, Luck, Hindsight and Outcome Bias

The halo effect describes the tendency to like or dislike everything about someone, without having evidence to support our judgement. Where our view is positive, we give those in leadership positions – enterprise, politics, religion etc. – the benefit of the doubt for all their decisions, and vice versa. Hindsight bias captures the situation where we “blame decision-makers for good decisions that worked out badly, and give them too little credit for successful moves that appear obvious only after the fact. Leaders who have been lucky are never punished for having taken too much risk. ..A few lucky gambles can crown a reckless leader with a halo of prescience and boldness (p. 204)…Because luck plays a large role, the quality of leadership and management practises cannot be inferred reliably from observations of success.” (p. 207)

He argues that most of us vastly underrate the role of luck in shaping outcomes. His favourite equations are:

Success = talent + luck
Great Success = a little more talent + a lot of luck

Ireland suffered from the global halo effect, in that all major independent assessors (IMF, OECD, European Central Bank) of our economic management before the crash were effusive in their praise.

The Importance of Framing

‘Framing’ is about the context and language used to present choices. Kahneman gives many examples, including: human organ donation – the rate is 100% in Austria and 86% in Sweden, compared with 12% in Germany and 4% in Denmark. The difference derives from how the choices are framed: in Austria and Sweden, you have to opt out of organ donation, while in Germany and Denmark, you have to opt in. Similarly, information saying (about food) ‘90% fat free’ will be perceived differently by most if it says ‘10% fat’, as will information on car performance that says ‘kilometres per litre’ vs. ‘litres per kilometre’. And, the wider the frame, the more informed the choices are likely to be.

Implications

I hope that his book will encourage other eminent economists to emulate Kahneman’s idea of pulling together key insights from their field in a manner that is accessible to the public. There was a time when the luminaries of our profession did this, but it has fallen out of fashion.

For governments who have to cut expenditure and raise taxes, a first reaction to the Kahneman opus is that the news is all bad. Our intense aversion to losses and our anchoring (as contrasted with our much less strong feelings about equivalent improvements) to the status quo ordains that such change will be universally unpopular. But nevertheless there are insights that that can help both governments and ourselves make the transition to a better future. It is a sad particularity of politics that incumbent governments tend to increase expenditures and reduce taxes as an election looms; this does give the electorate a good feeling. But if they are re-elected, and have then to increase taxes and/or reduce expenditure, the odium and negativity they will experience will far exceed the feelings of bonhomie they generated before the election. The ideal political and economic strategy would be to generate large surpluses in the good times, and then use these to maintain expenditure and tax rates in recession. This is the essence of the Keynesian proposition. Unfortunately, the optimism bias ensures that most politicians don’t expect recessions, and the immediate pressure to be popular and meet ‘needs’ – spend it while you have it – makes it difficult to be prudent and avoid the blow back.

For governments, setting the right frame, and focussing on losses reduced, rather than benefits accruing, will help mitigate the negativity. Thus, in the Irish context, when property taxes are being introduced, the focus should be on the losses that will be incurred if this is not done; these losses include take-home income (if increase in income tax is the alternative) and follow on losses in jobs as labour becomes more expensive; or (if increase in VAT is the alternative) increases in prices and losses in competitiveness and jobs. In the case of domestic water charges, similar to the above, but also note the loss in reliability of water supply and its quality if a sustainable funding system is not in place that encourages conservation. It is important to be as focussed and precise as possible, and not exaggerate the losses – just present the facts as best they can be discerned and the evidence that underpins them.
When we want people to act in ways that are in their own and (especially) in the public interest, we should frame the choices they face such that it is as easy and painless as possible to act appropriately (the organ donor case)

It is important that the new Irish Government Economic and Evaluation Service and those in the public service generally with responsibility for the design of policy absorb and apply the insights from behavioural economics.

To counter the planning fallacy and optimism bias, a key is to improve prediction, recognising that intuitive predictions tend to be overconfident and overly extreme.

Kahneman recommends the following:

• Identify the reference class – e.g. emergency health services, and then obtain statistics on reference class (e.g. costs per patient)
• Develop a large data base that provides information on plans and outcomes for hundreds of projects all over the world
• Generate baseline prediction
• Use specific information about the case to adjust the baseline prediction
• In the default case of no useful evidence, you stay with the baseline

For we the public, it is important that we resist the halo fallacy, recognising that “because luck plays a large role, the quality of leadership and management practises cannot be inferred reliably from observations of success (or failure)” (p. 207). Kahneman proposes that we should reward decision-makers on how the decision was made, not by how it turned out. Unfortunately, in Ireland, it is very difficult to act on this admonition. The most we get about decisions in the nature of how they were arrived at, predictions, processes, values, analyses, priorities and rationales are to be found in press releases, which vary in content and analytical quality. You cannot reward what you do not know. This omission is a discourtesy to the taxpayer who pays the bills, and a loss to us all. The new Irish Government Economic and Evaluation Service may begin to fill this gap, but it should be the task of all departments to do their bit.

And, as the autumnal gloom descends, do read Thinking, Fast and Slow.

Notes

Daniel Kahneman, Thinking, Fast and Slow, Penguin Books, London, 2012. All the pages numbers cited refer to this edition

Kahneman shared the prize in 2002 with Vernon L. Smith, who pioneered the use of laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.

Apropos the fact that we (unconsciously) strive harder to avoid loss than to achieve gain, Kahneman observes that “If in his best years, Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke, and his earnings by almost $1 million per season.” (p304)

The key evidence on the power of having to opt out in the case of organ donation comes from: J. Johnson and Daniel Goldstein, 2003. “Do defaults save lives?” Science, 302, pp. 1338-39

For The Sean Fitzpatrick quote click here

For the announcement of the Irish Economic Research Services March 6, 2012 by Brendan Howlin, TD, Minister for Public Expenditure and Reform; click here.

The evidence that we suffered from a global halo effect before the crash is the following:

On September 2007 (by which stage Irish bank shares had lost one-third of their peak value) the IMF commended Ireland’s “prudent fiscal policy”, mentioning “Ireland’s continued impressive economic performance”: [See Section IV of IMF Article IV Consultation on Ireland (IMF Country Report No. 07/325).]

On 20 November 2007 Lorenzo Bini Smaghi, one of the more vocal members of the Executive Board of the ECB, stated that

“The Irish example shows that it is possible to prosper in the monetary union while having a higher potential growth rate than the rest of the union. This does not need to be ‘paid’ in terms of divergent or explosive inflationary outcomes and / or in unsustainable competitiveness for the country.”

[ ‘The value of central bank communication’, Speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, Financial market speech series, Landesbank Hessen-Thüringen permanent representation of Hessen in Brussels, Brussels, 20 November 2007]

In April 2008 the OECD noted that “Financial Sector Risks have been Contained” and that “The Irish banks are well-capitalized and profitable, which provides a cushion to weather the more difficult times ahead.” [OECD Economic Survey of Ireland, April 2008, Chapter 3: Financial Stability: Banking on Prudence]

From October 2001 to March 2009 Ireland enjoyed AAA credit rating from S&P.

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