It is a pleasure to be in Dublin and an honour to give this Iveagh House lecture in memory of Jim Flaherty.
Jim’s attitude and actions typified the Flaherty family motto: Fortune Favours the Bold. Born the sixth of eight children in La Chine, Quebec; Jim Flaherty worked odd jobs and won a hockey scholarship to put himself through Princeton. Successful in private and public sectors; he rose to become Attorney General and Minister of Finance of his province before becoming Canada’s 37th Minister of Finance. Once there, his accomplishments were legion, ranging from creating and enhancing support programs for the disabled and care givers to setting the country back on the path to fiscal balance after the crisis and ensuing recession.
His tenure as Canadian finance minister was shaped by that crisis and its aftermath. It was my honour to work with him as Canada weathered the storm. And many of you worked closely with Jim as Ireland negotiated agreements with the Troika and devised policies to rebuild its battered economy. I am confident he would be proud of the progress Ireland has made.
I suspect he would be more than a little frustrated with the euro area, however. To his last days he remained unconvinced that Europe had fixed its problems, often berating colleagues at the G20 for the lack of progress. That was typical. Jim Flaherty was always forthright. He wouldn’t avoid a problem, hoping it would get better.
On current projections it will take the euro area eight years to achieve the recovery that Canada secured in two. Tonight I would like to draw on Jim’s legacy to reflect on how the euro area could act to avoid another lost decade. This matters for Ireland, Europe and the UK. The euro area is the world’s second largest economy.1
With 27% of global banking assets it is a key determinant of global financial stability. It is the UK’s largest trading partner and the single largest destination for UK foreign direct investment.
The euro area would do well to live up to the Flaherty motto because, although there was monetary boldness last week, the currency union has been relatively timid in putting in place the other policies and, crucially, the institutions necessary to deliver sustainable prosperity for its citizens.
Now is not the time for half measures. In all advanced economies, private investment is still being held back by a combination of modest demand prospects and lingering concerns of another major adverse shock. Nowhere are these impediments more severe than in the euro area.
Since the financial crisis all major advanced economies have been in a debt trap where low growth deepens the burden of debt, prompting the private sector to cut spending further. Persistent economic weakness damages the extent to which economies can recover. Skills and capital atrophy. Workers become discouraged and leave the labour force. Prospects decline and the noose tightens.
As difficult as it has been, some countries, including the US and the UK, are now escaping this trap. Others in the euro area are sinking deeper. This relative performance underscores the importance of policy and institutions, particularly those that share and transfer risks. Building institutions at a time of reform fatigue may not be easy, but it is essential.
​Fortune favours the bold
Lecture to honour the memory of The Honourable James Michael Flaherty, P.C.,Iveagh House, Dublin
1At market prices. In PPP terms it is third largest after China and the US.