maurice oa€™connell : the euro, the irish economy and banking supervision written submission by mr maurice oa€™connell, governor of the central bank of ireland, to the irish parliamentary joint committee on european affairs on 19 july 2000. * * * the outlook for the world economy remains generally good. europe has settled into a steady growth pattern and real gdp growth of more than 3 % is expected this year. unemployment is falling steadily. the us economy has continued to surpass expectations and there are now tentative signs of orderly slowdown. japan and the far east generally appear to have shaken off the threat of financial collapse, though recovery in japan is still tentative. a policy of zero interest rates and high public expenditure has not been enough to stimulate growth. the remarkable performance of the us economy has generated euphoria about a so - called new economy that offers the prospect of a permanent reduction in the natural rate of unemployment, substantial gains in productivity growth and lessens the risks of inflation. whether or not we are in a new economy, or a new information revolution, it would be unwise to conclude that traditional laws of economics no longer apply. there are new factors, but, whether these are a temporary phenomenon or a profound change, only time will tell. the world economy may appear fit and well but there is an imbalance that will require correction at some point. i refer to the record deficit in the current account of the us balance of payments, which is being financed by capital inflows from europe and japan. this may not continue indefinitely. capital will flow to wherever the strongest future return is perceived to be. the possibility of a sharp stock market correction also deserves attention. between end - 1996 and end - 1999 the dow jones index rose by 78 %, while the nasdaq index, which accounts for about one third of total stock market capitalisation in the united states recorded an increase of more than 200 %. in europe, structural weaknesses have continued to be a dead hand on the economy and reform is by its nature slow. in this context, the current taxation proposals in germany may prove to be a very significant development. very recently the oecd has issued warnings on the dangers of inflation both in the united states and in europe. when i came before this committee in february, i mentioned that the succession of economic crises in recent years had prompted the authorities to review comprehensively the whole international financial architecture. this review is ongoing and the financial stability forum ( a

is changing the whole environment. the latest phenomenon is internet banking which introduces new challenges for the regulator who must ensure that the interests of customers are safeguarded. financial institutions are concerned that there be clarity from a legal and regulatory perspective. the central bank has adopted a very positive approach towards the use of the internet as a medium to provide services ; a number of applications for licence or authorisation are being considered. our local industry is under threat from centralisation within the european union as the financial markets become more integrated. investors have a preference for larger markets with greater liquidity. up to 30 banks from the european economic area are now branching into ireland. we cannot entirely dismiss the prospect that within a few years the irish market could be dominated by foreign owned banks. competition is growing more intense ; there is a price to be paid and this is perhaps reflected in the recent closures of local branches which can no longer be subsidised. the irish banks must be cost efficient in order to maintain their position. this is the background against which the regulator must operate. a high level of professionalism is demanded. we must aspire to having the highest standards of regulation. we must keep pace with international developments and much is happening internationally. general in conclusion, may i draw attention to some figures in the annual report and accounts of the central bank for 1999. the banka€™s profits from its operations during 1999 were million. of this, million is transferred to the exchequer. at the end of last year, the bank reserves were in the region of billion. the numbers employed last year totalled approximately 650 of whom about 140 worked on supervision. full details of all our activities are given in the annual report ; i recommend this to the committee.