MNI INTERVIEW: Eurozone Fiscal Policy To Support ECB-Donohoe

The European Central Bank can be assured that eurozone fiscal policy will support monetary policy in its fight against inflation, Eurogroup President Paschal Donohoe told MNI.

In an interview following last Thursday’s Eurogroup statement on the Euro Area’s fiscal stance for 2024, Donohoe said that the declaration reflected a clear shift in direction towards a “restrictive” fiscal stance and away from the expansionary policies of recent years, which have met with strong criticism from the central bank since it started tightening monetary policy over a year ago.

“I would make the argument that the fact that the statement …. had two new elements shows we are looking to shift direction on budget policy. Number one, it contained the concept of fiscal consolidation and, in particular, used the phrase restrictive fiscal policy for the euro area in 2024,” said Donohoe, who is also Ireland’s Minister for Public Expenditure, National Development Plan Delivery and Reform. “Secondly, the fact it was clear that energy measures need to be phased out and, as they are phased out, they will be used to lower borrowing - for me those are new elements in the Eurogroup statement and are very important.”

INFLATION, WAR PRESSURE GROWTH

While the statement also noted that the process of fiscal consolidation would need to be “gradual” and “realistic”, Donohoe said those two concepts reflected a recognition within Eurogroup that the growth outlook “is one that is under pressure because of inflation and because of the war.”

The ECB can be reassured that the eurozone fiscal stance will reinforce its own actions.

“I think there is more than enough in that statement to indicate the commitment that finance ministers have to adopt a complementary approach to that of the ECB,” he said. “The recognition we have that we need to get inflation down and the recognition that an expansionary fiscal policy is no longer appropriate for the euro area, that indicates very clearly the commitment that we have to complement their work and not to get in the way of their task of pulling down inflation.”

In its response to the economic fallout from the pandemic and the energy price spike prompted by Russia’s invasion of Ukraine in February 2022, eurozone fiscal policies and the ECB’s monetary policy worked hand-in-hand to protect jobs and output, but governments have found it harder to bring down the high levels of debt they built up during those crisis years and so support the ECB’s struggle with inflation.

Donohoe said that challenges for fiscal policy are much more complex than in the past and that competing priorities have to be more carefully managed.

“Fiscal policy has to deal with so many competing pressures. We have on one hand the need to reduce borrowing, but we have on the other hand a need to invest in a competitive Europe and a need to invest in our defence capacity so fiscal policy now is just dealing with many different competing pressures,” he said.

“As sharp as the challenges were over the last number of years, when we were dealing with the pandemic and then the energy price shock, at each point then we were confronting a single obvious really big challenge. Now what we have is many different pressures on the direction and scale of fiscal policy.”

COMMITTMENT TO LOWER BORROWING

But the Eurogroup’s commitment to reducing borrowing is clear, he said.

“All that being said, there is a clear commitment there to reduce borrowing and if you have a deficit to make it smaller and if you have a surplus to make it bigger.”

Still, if the war in Ukraine provokes a new energy price spike, governments will have to revert to those measures they deployed over the past year to protect consumers and businesses, he conceded.

“I think in those circumstances (of a renewed energy spike) it would go beyond the normal automatic responses that would be there and we just have to recognise the reality that if we experience the energy price shock that we did in 2022 then governments would have to respond back to that again.”