now under way. with their due diligence complementing the tail - risk reduction envisaged from pcar2011, it is not unreasonable to suppose that such investors will see sufficient franchise value in the continuing banks to convince them that attractive investment opportunities exist. i look forward to welcoming new owners of ireland ’ s downsized and cleaned - up banks. reducing the risks of an underperforming economy also calls for sustained energy and commitment on a number of other dimensions. i have already alluded to the adjustments that have been needed in the other two fundamental pillars of the recovery, fiscal balance and cost competitiveness. both got badly out of kilter in, or as a result of, the boom years, in ways that i don ’ t need to rehearse today. as a professional deformation, i tend to talk a lot about banking, but i don ’ t want to fall into the trap of having you believe that the fiscal crisis is all about meeting the banks ’ losses. to be sure, the fiscal crisis has been brought on by the bank - driven boom and bust. but i hope it is some comfort to be reminded that only something of the order of one - eighth of the fiscal adjustment over the coming years is attributable to the additional debt servicing costs resulting from the additional borrowing to fill the banking hole ; the remainder is to claw the budget back to where it would have been if the structure of tax and the level of spending had not veered out of what could be sustained during the bank - driven property boom. the current impact of the banking losses on the economy is not so much via the net longterm taxpayer cost, but comes mainly as a result of the accumulation of debt. the jump in debt associated with these losses is of the same order of magnitude as the rest of the borrowing 2009 – 10 ( fig. 4 ). either of these components would have been unproblematic, together they make the markets and the rating agencies nervous. the fiscal adjustment could possibly have been delayed by a year or two had it not been for the banking losses ; now it cannot wait. there have been misgivings about the scale of the fiscal adjustment and the withdrawal of aggregate demand that it will entail. before the eu - imf programme was agreed, it was clear that a less rapid adjustment was infeasible given the rapidly diminishing appetite of the market for additional irish government bonds. now that the programme is in place, the

patrick honohan : banking union challenges opening statement by mr patrick honohan, governor of the central bank of ireland, to the joint oireachtas committee on eu affairs, dublin, 30 april 2013. * * * we thank the committee for the invitation to appear before it and contribute to its important work on the future of economic and monetary union. important because of the scale of the challenge to restore stability and create sustainable growth and jobs. important also because of the role of the committee in ensuring democratic participation and accountability on eu issues. the euro area has been battered by the fall - out from the great financial crisis that broke out in 2007. when the flood of financial globalisation receded, it exposed interrelated banking and fiscal and competitiveness weaknesses in many euro area countries. cross - border banking claims threatened to transmit weakness from stressed countries such as greece, portugal and ireland, to banks elsewhere in the monetary union. high indebtedness of some countries no longer seemed as easily supportable as had previously appeared. and even stronger countries experienced sizable banking losses. accelerated balance sheet repair associated with aggregate macroeconomic demand weakness has meant that recovery has been slow and tentative. this combination of pressures – primarily related to banking and wider financial sectors, as well as to macroeconomic and fiscal imbalances and divergences in competitiveness, has represented a significant challenge to the cohesion of the union. both borrowers and lenders became apprehensive and protective of their interests. at certain moments in 2011 – 12, the combination of problems seemed to market participants to threaten the very sustainability of the institutional arrangements supporting the common currency. while such fears have been allayed by the credibility of subsequent action, most notably the announcement of the outright monetary transactions ( omt ) programme of the ecb, the wider need to rebuild trust and strengthen the institutional architecture of the system is evident and confirmed in a general recognition that progress needs to be made on four dimensions, banking, fiscal, economic, and political, as adumbrated in the report of the four presidents ( of the european council, the european commission, the eurogroup and the ecb ) last june. i think it will be most appropriate for me to focus my remarks today chiefly on the banking pillar, i. e. banking union. we need banking union to transform the financial system from a source of risk and instability to a source of growth and support to the real economy. we have in fact made considerable progress in recent