EU governments can expect to borrow heavily for at least another 12 months, Minister for Finance Paschal Donohoe has said ahead of a meeting today of euro zone finance ministers.
Mr Donohoe chairs the Eurogroup, the influential council of finance ministers, having won election to the post last summer. Today's monthly meeting will discuss "imbalances in the euro zone in the wake of Covid" as well as the "recovery and resilience" plans across the bloc. In the week that Joe Biden is inaugurated as president of the United States, there will also be a discussion on relations with the US, involving the former treasury secretary Larry Summers.
The pandemic has upended public finances all over Europe, leading to the suspension of the EU's fiscal rules, a mega-stimulus fund to be allocated to member states this year and a new willingness from the European Central Bank to back unprecedented borrowing by national governments.
Speaking this weekend, Mr Donohoe said the ECB and the European Commission will maintain their positions at least into early next year.
This will allow government to continue to borrow in order to maintain supports for workers and businesses.
Mistakes
All finance ministers, Mr Donohoe said, are facing "similar dilemmas and situations to what we are grappling with in Ireland. They're looking at how supports need to be maintained or made more effective to try to reduce the harm that's being done to jobs and the growth potential of economies and to societies."
Though he declined to spell it out during an interview with The Irish Times, it’s clear Mr Donohoe is one of the voices urging policymakers to learn the lessons of the past and avoid the mistakes of a decade ago.
The response to the current crisis is, as Mr Donohoe said, “profoundly different” to the aftermath of the financial crisis, when a period of austerity was the chosen means to correct the public finances of crisis-hit economies.
The Government will seek to maintain high levels of public investment for the coming years, he said. “When I began as Minister for Public Expenditure, the average level of public capital investment in our economy was around €3.5-4 billion, this year we’re planning it to be €10.5 billion,” he said. He is committed to maintaining this high level of investment for a long period of time – avoiding the pitfall of the last crisis, when capital investment was slashed, along with everything else.
“The people who have been affected by this crisis across Europe, and not just in Ireland, have been particularly younger workers,” he said. “It’s why it’s so vital that we have the budgetary policies to place to support those people getting back to work.”
There will come a point when the supports, here and across Europe, will be “tapered” as economies begin to reopen and recover. But that is “not a critical area of focus now, because the health situation has changed so quickly”.
“We will get to a point when we will have to make those decisions, yes we will. We will get to a point when the different schemes in place will have to change.” He declined to be drawn on when exactly.
Economic health
“The reason it’s difficult to be accurate about a forecast on the timing is the nature of the disease itself. Most of the times you give an indication regarding a deadline or a time in which things could go back to normal, we’ve learned that the disease has the ability to rip up those deadlines.
“So even now, it’s very difficult for me to make a forecast about when budgetary policy might begin to change. But I do think there are signposts in that, some of which will guide us in that, some of which are in relation to public health, and then others of which are in regard to economic health.
“From a public heath point of view, I think the three key factors will be, where we are with the vaccination programme, secondly where we are with community transition, and thirdly where we are with what is happening within our hospital systems. I think they are the things that will be relevant to economic decisions that happen.
“And from an economic point of view, the key things for me will be where we are with employment levels in our economy, and where we are with consumption and spending decisions in our economy. They will be the indications we will have to look at to figure out how we adjust to this kind of change.”
He said the model to be followed will likely be the same as the Government began last summer, tapering off supports as the economy reopened. Those moves have since been reversed, of course, but Mr Donohoe expects a similar approach will be followed in the months ahead when the next reopening begins.
