UPDATE 1-Irish c.bank governor: Europe must focus on growth

Thu Apr 26, 2012 3:13pm EDT

Related Topics

* ECB governing council member Honohan backs growth drive

* Says supports EU fiscal treaty due to its flexibility

* Calls on banks to work harder on borrowers in arrears

DUBLIN, April 26 (Reuters) - The governor of Ireland's central bank on Thursday called on Europe to focus on boosting growth and tackling unemployment as the fastest way to address the continent's debt and deficit problems.

The comments by Patrick Honohan, a European Central Bank Governing Council member, follow ECB President Mario Draghi's call on Wednesday for a European "growth compact".

European cooperation "must emphasise a growth and employment focus which, if successful, could have the effect of dissolving debt and deficit problems faster than anything else", Honohan said in a speech in Dublin.

The European Union, which generates about a fifth of global output, has struggled to strike a balance between austerity and growth as it seeks to overcome a decade of high spending while grappling with recession.

Leaders of EU member states have intensified calls in recent days to balance the continent's new fiscal treaty, which would impose automatic sanctions on states with a budget deficit over 3 percent of GDP, with moves to boost growth.

Ireland on May 31 is to hold what will probably be the only popular vote on the treaty, which will make it harder for countries to use borrowed money to boost growth during downturns.

Honohan said he supported the treaty because the rules involved "considerable discretion and judgment" that would offer flexibility to countries who sign up.

"It will be important to ensure that, if needed, such flexibility is fully exploited in Ireland's case," he said.

Honohan said the Central Bank saw some benefit in the idea of speeding up the fiscal adjustment in Ireland, which aims to reduce its deficit from 9.4 percent last year to 3 percent in 2015 under its EU-IMF bailout.

"The duration of the negative demand impulse and any associated uncertainty would be shortened, in order to speed the resumption of more rapid growth," he said.

Ireland's EU/IMF lenders said on Thursday they would let it spend more proceeds from the sale of state assets on stimulating the economy, suggesting greater willingness within the euro zone to temper relentless austerity with some growth strategies.

Honohan also called on Ireland's banks to speed up efforts to deal with borrowers in arrears. Nearly one in seven home loans in Ireland are not being fully repaid.

"Overall we now feel that the main banks have been too slow to organise themselves sufficiently for the very large and complex task of engagement with delinquent borrowers," he said.

The central bank believes lenders should proceed "with realistic loan modifications where - and only where - necessary and not shying away from foreclosures in the (buy-to-let) segment in cases where this proves inevitable", he said.

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