Building economic resilience is key for Ireland – Central Bank Governor Gabriel Makhlouf

Governor of the Central Bank of Ireland Gabriel Makhlouf spoke in Dublin this afternoon at the Institute of International and European Affairs (IIEA) about building economic resilience against an uncertain international backdrop. 

The Central Bank today also publishes a letter Governor Makhlouf wrote to Minister for Finance Paschal Donohoe (PDF 2.83MB) setting out his views on the macro-financial environment, the financial services landscape and the Central Bank of Ireland’s financial regulation priorities for 2025.  

Speaking at the IIEA, Governor Makhlouf said that we are navigating a new era of change to the international order that has underpinned global cooperation since World War II. Geoeconomic fragmentation has moved from being a risk to becoming a reality, and as a small, open economy, Ireland finds itself at the cross roads of these geopolitical headwinds.

Governor Makhlouf said: “Ireland and our partners in Europe are undergoing significant economic transitions in climate, in demography and in technology.  On the face of it, we are also undergoing a significant economic transition in how international trading relationships are made and nurtured. The growing fragmentation of the global economy is a challenge to Ireland’s openness, which has been one of the defining features of its economy and a key platform for the country’s living standards. Building economic resilience – through investment in physical and human capital in particular – is the most effective way of helping to manage these transitions.”

On inflation, Governor Makhlouf said: “Needless to say, the disinflation process remains subject to risks, and there is a very high degree of uncertainty surrounding the outlook. We stand ready to react to changes in the outlook, for both inflation and growth, which is why my colleagues and I (on the ECB’s Governing Council) continue to believe that we should not commit to any specific future path for interest rates.”

While the economic outlook for Ireland is favourable, the Governor said downside risks have increased and there is a higher level of uncertainty. 

As we look forward, Governor Makhlouf said that Ireland faces some profound economic challenges and significant opportunities.

He said: “I see two particular economic challenges that need to be addressed without delay: the infrastructure deficits which are affecting housing, transport, energy, water and waste water, and the risks to the Exchequer from the over-reliance on a relatively narrow tax base, especially in the context of a changing global environment.

“With the economy still operating somewhat above its potential currently, the infrastructure constraints that further limit sustainable growth in living standards have become apparent.  The ability to deliver infrastructure is particularly important not least to maintain incentives for inward investment. It is even more important at a time of geoeconomic fragmentation. 

“As for the risks to the Exchequer, Corporation Tax now accounts for 25 per cent of tax revenue. Over 90 per cent of it is paid by foreign-owned firms, with only a third (c.€5bn) of the proportion deemed ‘excess’ from domestic economic activity being put aside for the future.  Corporation Tax is particularly vulnerable to geoeconomic fragmentation, whether as a result of trade tensions or changes in third-country policies. A substantial loss of the tax would push the budget into a deficit position, something that would have negative consequences for all of the required infrastructure development currently in the pipeline.”    

Governor Makhlouf said Ireland and Europe’s ageing demographics pose significant challenges, adding: “These shifts carry far-reaching policy implications, impacting working age and pension sustainability, healthcare resourcing, infrastructure, and our broader fiscal resilience.  Addressing these challenges requires forward-thinking strategies.”

On climate, Governor Makhlouf said concerted investment efforts are needed to reduce carbon emissions. “We still have an opportunity to make a considerable impact on reaching our targets, and the next five years will be critical for the transition towards climate neutrality, but there is considerable work to do,” he said.

Notwithstanding the major global challenges, Governor Makhlouf said there is an opportunity for Irish economic policy to contribute to sustainable growth in living standards. 

Governor Makhlouf said: “In order to do so, I believe the following areas of policy focus should be considered.

“Prioritising capital expenditure and tax base broadening to create the economic and fiscal space for the necessary increase in investment needed in the coming years;

“Enhancing and introducing structural reforms to reduce the costs of infrastructure delivery and boost productivity in the construction sector;

“Further enabling increased labour force participation and productivity by supporting life-long learning and adaptation to technological change;

“Continuing to support efforts to mitigate geoeconomic fragmentation while protecting supply chain security.  At EU level, this should include supporting actions to remove frictions in product and labour markets and harmonise rules and regulations across countries to improve the functioning of the Single Market, particularly for intra-EU trade in services. Related to this, it is important to ensure that competition policy frameworks are equipped to deal with the fast-changing environment in which we live in order to maintain the balance between innovation incentives and competition, particularly as AI changes the business and technological landscape.

“Achieving decisive progress across these policy priorities would boost productivity which is at the heart of building resilience.

“All aspects of policy – fiscal, structural, industrial, financial sector and monetary – have a role to play. With euro area monetary policy becoming less restrictive and the Irish economy expected to grow in-line with its medium-term potential, the role of domestic policy in maintaining macroeconomic stability comes to the fore.  I have emphasised to the Minister for Finance the importance of the Government committing to rigorous expenditure control alongside an appropriate anchor or fiscal rule for budgetary policy to ensure the overall fiscal stance is appropriate, guards against pro-cyclicality and boom-bust dynamics and safeguards long-run fiscal sustainability. 

“This should support the creation of the necessary economic and fiscal space for the investment in infrastructure and the other structural reforms – in particular with regard to planning regulations – essential to Ireland’s resilience and future prosperity.”

The Governor said the financial sector has an important role to play in supporting the broader economy through the transitions we are living through, adding that “both domestic and EU policy efforts should be enhanced to translate savings into investment and create a more vibrant funding environment for infrastructure and innovation.  The Savings and Investments Union must deliver if Europe is to regain its competitive edge, and if we are to find ways to unlock the €11.5 trillion held by Europeans in deposits and cash and channel it to drive European innovation, while maintaining our resilience in the face of future potential shocks.”   

The Governor said the Central Bank of Ireland will continue to focus on its mission of maintaining monetary and financial stability. He said: “In particular this year, we will work with peers and other stakeholders on the simplification agenda and look to enable properly-functioning markets that support innovation and productivity without undermining core policy objectives such as financial stability and investor and consumer protection. In any drive to simplify, we need to be clear that we do not compromise on delivering the stability, resilience and protections that consumers and the wider economy need and that the public expects.” 

ENDS

Governor Makhlouf’s full speech is available here.

Governor Makhlouf’s letter to Minister for Finance Paschal Donohoe is available here (PDF 2.83MB).

Further information

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Martin Grant: [email protected] / 086 078 7868