Speech by the Eurogroup President, Paschal Donohoe, at the IMF Governor Talk on “Euro area recovery from Covid-19 – economic policy reflections and challenges ahead”, 12 October 2021

Thank you for the introduction. Let me also acknowledge the central role the IMF has played in guiding our world and in helping Europe respond back to the human and economic consequences and risks of COVID-19.

I am delighted to be here with you today. I regret that I cannot be with you in person. The main reason for that is that the budget for Ireland is on the week of your meetings. I hope you will understand that my parliamentary and government responsibility requires me to be in Ireland to do our budgets.

For this event today, I would like to speak to you in my role as President of the Eurogroup. This is very timely, that we are discussing the role of Europe because our October Eurogroup meeting just happened in Luxembourg. This gives me a very good perspective on where we stand on many of the issues in Europe.  

The value of these meetings within the IMF is that they allow us to reflect on where we are today but, more critically, to think about where we want to go to and the work that we need to do together.

Euro Area Recovery – Economic Policy Reflections

I’d like to start by reflecting for a moment on where we were in the 2021 IMF and World Bank Spring Meetings, because, at those events, a number of questions and issues were raised about where Europe stood with regard to growth, the economic response to COVID, and the impact of our vaccination programs.

In my answers to those questions, I was very hopeful about the ability of Europe to make progress, hopeful and confident even, that our economic policies would work and that we would accelerate our vaccination programs.

At that point, I was cautiously optimistic.

Today, I am pleased to say that this optimism was warranted as we have delivered across a wide range of fronts.

First, in terms of vaccinations, we have administered close to 575 million doses in the EU with three quarters of the adult population vaccinated. Europe is also the leading exporter of vaccines with half of our production, around 700 million doses, shared with the rest of the world.

In terms of growth, the Euro Area, after a tough first quarter, due mainly to the pandemic, has bounced back strongly as health restrictions were changed.

Similar to the vaccination story, the growth performance is ahead of what we might have expected a few months ago. The Euro Area is on course for growth in the region of around 5 per cent, both for this year and next, with a return to pre-pandemic levels of output by year-end.

The jobs’ market has also been particularly resilient and overall the rebound is turning into a recovery. However, there are three particular dimensions that are worth highlighting.

First, once the pandemic hit, the automatic stabilisers in Europe – which are a feature of our social protection systems – were allowed to act fully and without delay.

These supports often tend to be underestimated by the simple fact that they are “automatic” within the EU with no real fanfare or drama around them.

However, they are an integral part of budgetary policy.

They were designed to allow our economies to buffer the COVID-19 shock and to support our economies in recovery once restrictions were eased.

Secondly, the EU as a whole did step up. The early decisions to suspend the normal state aid and fiscal rules were so valuable. In addition, the new EU safety nets of the Recovery Fund, the SURE programme,  the Pandemic Crisis Support programme from the ESM and the EIB’s pan-European guarantee fund all have worked.

In particular, it is worth mentioning the SURE programme, which has been a little bit of  a “hidden hero”  with 31 million jobs contributing from the scheme.  

We also have Next Generation EU’ (NGEU) coming on-stream exactly at the time we need it, with targeted funds of investment to support economies in their transitionary efforts.

Thirdly, the role of monetary policy has also been important.  The ECB was decisive and swift in creating the supportive environment that we needed.

Overall, what we have done is to maintain the symmetry between monetary and fiscal policy. This has been so important in cushioning our economies from the shock but critically  in leaving us in a good place to recover strongly and quickly.

Euro area recovery – economic policy challenges ahead

However, there are several challenges ahead and I will say a word about each of these:

• fiscal policy
• the fiscal framework and
• Banking Union.

First, on the budgetary policy side, Eurogroup remains unanimous on the need for supportive budgetary policy in 2022. Put simply, there will be no premature withdrawal of support.

However, that is not to say that policy will not change. As economies re-open, supports will become more and more targeted.

This is the right course of action.

Many of the details will appear in Member States’ budgetary plans in the coming weeks and these will be discussed at Eurogroup.

We are also aware of the asymmetric impacts of COVID-19, particularly in terms of its effect on the labour intensive services’ sector.

As finance ministers, we must continue to allow our tax and welfare systems to protect the incomes of the most vulnerable. But we also need to be alert to new risks such as the risk of alienating certain skill-sets and occupations. Moreover, the transition to new working arrangements are potentially difficult for many and not always automatic.

So, a lot of our time and attention will go into retraining and reskilling programmes and in having the right active labour market policies.

We need to get our citizens back into the labour force.

Secondly, the fiscal framework in the European Union will be a keenly debated topic once the Commission relaunches its consultation on the economic governance framework.

This is something that Eurogroup will be closely involved with and I anticipate wide-ranging discussions in the coming months.

This is a difficult and challenging subject.

There are well known positions in Europe and we will need to work hard to reach any agreement.

As part of this, compromise will be important but we approach this debate from a position of strength given the level of coordination and consensus to date on budgetary policy. We need to reflect on the positives of these achievements in the current framework as we begin to think of the new realities that include higher levels of indebtedness and investment needs, particularly linked to Next Generation EU.

That leads me to my final point and to where we are with Banking Union. This  remains an incomplete project within the European Union. I have put a huge amount of effort into this and earlier in the summer, ministers once again emphasised the need to deliver an ambitious and meaningful workplan.

This includes four key and interconnected work-steams:

• a framework for crisis management,
• a common deposit insurance scheme,
• cross-border integration and
• the management and diversification of sovereign holdings.

We have already made progress over the past year, principally through the agreement on the ESM Treaty Reform at Eurogroup last November. This will bring forward the operation of an important safety net (the backstop to the Single Resolution Fund) by two years.

However, there are areas where progress has been more challenging.

I remain convinced that progress is possible and that we can deliver a meaningful workplan in the coming months.

Put simply, if you look at this crisis compared to the past, our banking system has proven to be extraordinarily resilient.

It has been a source of strength, not an underlying source of vulnerability.

For a sustained economic recovery, we need to have a strong and competitive banking sector, one that provides the capital and liquidity that in turn fuels our economy, and we will continue working towards that goal.

So to conclude, this terrible disease has been a great test for all of us. However, I believe that so far, we have risen to the challenge. In the Euro Area, our policy action has been strong, supportive, swift and coordinated.

This partly reflects the lessons from the past but this crisis has also made us reflect on what it means to be a European.

Our four freedoms – the freedom of movement of capital, goods, services and of people – are central to us as Europeans.

Each of these were threatened by this terrible disease. That is why the health and economic responses have been so strong and backed by consensus. However, there are still many challenges and uncertainty ahead. We are also very attune and aware of new challenges such as the recent increases in energy prices and their potential implications – for growth, budgetary strategy and the competitiveness of Europe.

More broadly, with regard to COVID, there is a deep responsibility on us to do as much as we can to continue delivering vaccines both within Europe and to the rest of the world, as this virus respects no borders. However, we have achieved a lot and I believe we can make the case for a brighter future.

To that end, I’ll leave you with a famous quote from one of the European Union’s founding fathers, Jean Monnet, that seems particularly apt given the past year:

“People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.”