20 May Ireland lays the foundations for sustainable and inclusive economic rebound
Paschal Donohoe, Minister for Finance, explains how Ireland and the European Union have collectively risen to the challenges of COVID-19 and Brexit.
Last fall, the Irish government presented a budget unprecedented in size and scale to sustain the Irish economy to meet the double challenge of COVID-19 and Brexit. In parliament that day, you said, “From the ashes of the pandemic together we will build a stronger and more resilient Ireland.” To start this interview, I’d like to ask you to highlight the main characteristics of the budget that you presented.
The budget that we introduced looked to invest and spend in our economy exactly at a time when demand, employment and income from our private sector were collapsing. In essence, what the Irish government was looking to do was to provide income and investment and, while doing so, inject confidence at a time when our private sector was unable to do to that, because of the effects of this pandemic. So, firstly we increased our capital expenditure within our country’s economy, exactly at the time when we needed to do this. In the past, our budgetary policy in Ireland had been to increase capital spend when the economy was already growing very quickly. So instead, what we’ve done this time is to step in and provide certainty about public capital investment, exactly at the point when there’s uncertainty about private capital investment.
The second significant dimension of what we have done is the certainty of providing an income for those citizens who lost their job as a result of COVID-19. We have provided them with a higher level of income replacement at a time when lots of jobs have been lost. The government was asking companies to close down, indirectly causing lots of people to lose their job and, therefore, the decision we made was to compensate these workers with a higher level of income support. For companies that were viable and able to keep trading but were facing a higher level of pressure, we introduced an income subsidy scheme to support them in continuing to trade. This resulted in over 300,000 workers continuing to have employment in firms that needed additional help to carry on trading, and that would be viable and successful once we emerge from the pandemic.
In summary, our budget was about the state providing income and investment at a time when uncertainty about income and investment prevailed. The main features are income replacement and capital investment within our economy, when both income and investment were declining very quickly.
According to the Economic and Social Research Institute, Ireland could stage a return to economic growth reaching 4.9 percent of gross national product in 2021, in spite of the pandemic, job losses and Brexit. That figure is mostly a result of Ireland’s strong export performance and the many multinationals that are operating in the country. Do you agree with that forecast or what is the ministry’s current estimate for the country’s economic performance this year?
It’s incredibly difficult to forecast anything at the moment. One of the things that this pandemic brought is uncertainly: very often you think you know what is going to happen, most of the time something else happens. It’s really difficult for anybody at the moment to be able to forecast very accurately how economies will perform. Even the difference between economic outlooks made early December and early January are probably very significant for many forecasters, many banks, many departments and financiers all over the world.
That being said, if we are successful in making our vaccine available in sufficient numbers from quarter one onward, when we get to that point, we will see our economy recover. I do believe then that economic growth of between 3-4 percent, even a bit higher, is absolutely possible for our economy. Yet I think it’s important to put that against the context of the economic harm that has been done in 2020, and not assume that a rebound in economic growth is the same thing as economic recovery.
We will need the Irish government to continue to intervene within our economy, to ensure that we are on a pathway of sustainable economic growth across the coming years, because it’s going to take more than a single year to undo the harm that was caused in 2020. While I am confident of seeing a rebound in our economy in 2021, I am more focused on having sustainable recovery over a number of years. That will mean continued support for particular sectors within our economy and continued investment in some parts of our economy.
As President of the Eurogroup since July 2020, you have been at the forefront of making key decisions at the European Union (EU) level. In an interview in December, you said, “If 2020 is a year without recent precedent with regard to our health, it was also a remarkable year for economic decisions that responded to the crisis.” How would you assess the overall response of the EU regarding the pandemic and the implications of that on employment, economies and the welfare state?
I believe that economically the EU rose to the challenge of COVID-19 in 2020. I acknowledge the many millions of European citizens that are now without a job and the many millions of European citizens that are worried about their job and their income falling. I’m very much aware of the stress across all of our friends and neighbors in Europe, as we fight this terrible disease. But I would still make the case for saying that, during those very darkest of days last year, the EU economically did respond back to this COVID challenge in a way that is making a real difference.
There are three reasons why I would say this. The first one is that I do believe in the impact of the recovery and resilience fund, which was spearheaded by President Macron, by Chancellor Merkel, by EU Commission President Ursula Van der Leyen. This initiative is going to make a very meaningful difference to the recovery in 2021, 2022 and in 2023. Indeed, the European dimension of supporting rebuilding an economy could very well be the difference between a rebound and a recovery. I think it was a really essential and pivotal intervention by the EU.
Secondly, the role of the European Central Bank (ECB) under President Christine Lagarde has also been remarkable. The speed with which the ECB responded to this challenge in the second quarter of 2020 was so important and made such a difference. It enabled national governments to do what needed to be done, to put in place the income support plans, to put in place the investment plans, to respond back to the unemployment challenges that we were all facing. And then thirdly, within our institutions the work of the European Commission, the decision that was made in relation to the fiscal rules, the work of the European Investment Bank and the work of the European Commission that has gone with the shared program to helping countries borrow more effectively to pay for wage subsidy schemes have been remarkable. These have all been really important interventions.
As dark as the circumstances are at the moment, and as worried as many people feel, the work of the EU has prevented even greater challenges occurring. It has laid the foundations for Europeans to be able to recover from this terrible disease. The EU, this time around, has been very different and very significant in responding to the economic crisis.
Aside from COVID-19 and Brexit challenges, what do you think are the three most important hurdles or challenges that the EU will be faced with over the next five years or so?
We need to pave the way for an inclusive recovery, and a recovery that ensures that those who’ve been hurt the most by COVID-19 aren’t the ones who have to pay the most as our economies recover. I think particularly of young women and men who are working in parts of our economies that have been really hurt by COVID-19. We need to engineer a recovery that makes a difference to them, that makes a difference to them getting their job back and makes a difference to them being confident about their own lives again.
The second thing is how we can have a recovery that is green and digital. We also cannot forget about the immense challenge and crisis that climate change is. As we are restructuring and re-engineering our economies from the harm of COVID-19, we have to look at how we can do this in a way that responds back to the ecological change and the environmental change that we have a moral duty to do more on.
The final thing that I’d like to stress is that we need to have a recovery that is really European. If you look at the Irish economy, we are a really small economy. We are geographically on the edge of Europe: our nearest neighbor in the EU is now France. How the French economy recovers is really important for how the Irish economy recovers and, in turn, other countries’ recovery as well, so we can purchase the French exports that are really important for the French economy to recover. How we use our interdependence to help each other recover better is really important I think. Within the Eurogroup, we’re doing a lot of thinking and work to try to make sure that we have a recovery that really pulls everybody along together and is more inclusive than other recoveries that we’ve had.
Brexit became reality on 1 January. How have Ireland and the Irish business community prepared for that over the past four years? What have been some of the immediate implications of Brexit for Ireland that you have seen so far?
We have put a huge amount of effort and focus on dealing with Brexit over the last four years. Much of the effects of this have been very practical. For example, we now have a new ferry route going from Ireland directly to France where we’ve really increased the capacity of our direct ferry services between our two countries. France is now going to be our entry point into the EU from now on, where far more of our goods will circulate than in the past. We put a huge amount of focus on supporting our exporters to get ready for the new customs requirements and the new regulations that they will have to meet as a result of dealing with the U.K. as a third country. We also spent a huge amount of effort and time getting our ports and our airports ready to deal with these new requirements.
Probably the most important area of focus for us, and the political focus of the last four years, has been on how we get the balance right between having an arrangement with the U.K. that respects the peace process on our island and avoids the risk of a hard border on our island, but at the same time insures that Ireland continues to be a core member of the single market.
As of today, we have been successful in doing that and we will continue to be successful in doing that. We want to ensure, for example, that when French consumers are buying, let’s say Irish butter or Irish lamb, that they do that with absolute confidence that they are purchasing food products that have been grown within the single market, raised within the single market and meet all the requirements of the single market. This has been a massive area of focus from the Irish government. We will continue to ensure that we uphold all the commitments that we have to our French and European neighbors and friends.
To what extent do you think that Ireland will gain from Brexit in the long run? What kind of positive outcome do you expect going forward and which sectors in particular do you think will benefit from Brexit?
Overall, there is little upside for Ireland in Brexit from an economic point of view. It will decrease our potential economic growth in the years to come, because the U.K. continues to be a massive trading partner of Ireland, and the impact of trade flow on Ireland as a result of the U.K. leaving the single market is going to be very significant. Across the short to medium term, Ireland may well do a little bit better than we would have anticipated—for example, in financial services. Yet other parts of our economy will suffer in trade terms, such as agriculture, so that the negative effects will out weigh any positive gain we may make in other parts of our economy.
In the long run, our membership of the single market, our membership of the European project, continues to be the single most important foundation for the long-term political and economic development of Ireland. Even though we are going to face challenges in the short term and even in the medium term, our membership of the European project continues to be the single best way in which Ireland can navigate through these challenges. I’m confident that, as the European project continues to grow and continues to strengthen, Ireland can contribute to that and also benefit from it.
Can you elaborate a little bit on Ireland’s national response to climate change? What kind of unique initiatives would you like to highlight that the country has taken?
The most important one that I’d like to highlight is what we are doing with carbon pricing or carbon tax in Ireland. We have now embarked on a multi-year program for increasing taxation on carbon to try to fundamentally change consumption and investment decisions with regard to transport and with regard to private sector investment. For the last two years in a row, we have now increased our carbon taxes. We have passed into law a commitment that for each year up to 2030 we will increase carbon pricing, year after year. We’ve brought into law what level of carbon pricing increase will happen. From a finance point of view, in my role as Minister for Finance, I think that’s probably the single most important feature of what we are doing. We are trying to provide greater certainty regarding how the price of carbon will increase and change in the future to, in turn, encourage private and public sector decisions in relation to the use of carbon.
We have a real challenge here in Ireland because of the nature of our economy, because of our low population densities. Meeting our climate change obligations, which we want to meet not just because we’re required to do so by law within the agreements that we have within the EU, but also because it’s the right thing to do. It is going to be very challenging for us, but the decisions that I’ve made now in relation to carbon pricing, for example, is a sign of our determination to do that.
It is said that, as Ireland’s Minister for Finance since 2017, you returned your country to the path of budget control after the severe recession caused by the 2008 global crisis. That was in the past. What will people say of your tenure as Minister for Finance in one or more years from now, do you think?
That is a very hard question to answer! I hope people will see that in my role as Minister for Finance for Ireland, I tried to use the resources of our economy to support those who needed help the most at a time of great challenge. It really matters to me that we were able to use the resources of a wide and growing economy to help those in need the most. That’s the challenge that I continue to set for myself, whether it’s those who’ve lost their job for reasons completely beyond our control, whether it’s small- and medium-sized employers within our country that now face huge challenges but employ so many people. I’m really focused on how I can help them to recover from this awful disease.
In my role as President of the Eurogroup, what matters to me is that people look back at my mandate and see me as being an inclusive president, and one who made progress on putting in place the right budgetary policies for the euro area to deliver a more inclusive recovery for Europe and for the people of Europe. That is a massively important priority for my team to deliver.
To conclude this interview, what would be your final message to our readers?
We are going to get through this disease. We will get to a place in which we can feel that our efforts to look after each other and to support each other have worked. Across Europe and within Ireland, if we continue to work together, we can rebuild lives and help people who’ve been really hurt. We will do that. As great as the challenges are at the moment, if we all work together collectively we will pull through this crisis. We will get to a point later on this year at which we can feel that we all have better days ahead.