Good morning and thanks to the organising committee – New Economics Foundation and Finance Watch – for the invitation to speak today.
It is a privilege and a key part of my job as President of Eurogroup to attend and speak at these events and I hope your deliberations go well.
Ideally, I would have liked to have participated “live” but this period is exceptionally busy as a result of both domestic and European work. This includes preparations for the upcoming Irish Budget and of course next week’s Eurogroup meeting.
For today, I will speak from my position as ‘President of the Eurogroup’.
I have been in this role for just over a year now and I will try to give you a sense of where we are in terms of the Euro Area’s budgetary strategy.
I am also conscious that the fiscal framework is topical given the Commission’s recent announcement that it would shortly relaunch its review.
I will again aim to touch on this from a Eurogroup perspective.
Euro Area Budgetary Strategy and COVID-19
So turning to the budgetary strategy across the euro area. Since the pandemic hit in early 2020, I believe that budgetary policy in the euro has been very supportive and it has been agile.
There are three broad facets to this.
First, once the impact of COVID-19 became apparent, member states allowed their tax and social protection systems to act in full and without delay.
These are the so-called “automatic stabilisers” that are such as integral part of fiscal policy at a national level and then within the European Union.
However, these were supplemented by a range of new discretionary support measures, such as additional health spending and wage subsidy schemes, that further protected homes and businesses.
All of this was facilitated by the early decision (in March 2020) to suspend the fiscal rules and to ease State-aid requirements. These actions sent a clear and early signal that the response to COVID-19 would be very different to previous crises.
As a result, we have seen high levels of borrowing right across the Euro Area since the end of 2019. Last year, the budget deficit in the Euro Area amounted to 7.2 per cent of national income and a similar figure is likely for this year.
These are unprecedented levels of borrowing but they reflect the strength of these so-called “automatic stabilisers”, additional health spending and also the impact of new discretionary supports schemes.
These actions were also complemented by a series of guarantees and liquidity supports for businesses.
All of these supports cushioned our economies from the worst effects of the pandemic. They also left us in a good place to recover once vaccinations gathered momentum and as restrictions were eased.
We have seen the success of this strategy over the summer months and the budgetary policy within the Euro Area has been integral to the economic rebound currently underway.
Second, aside from member state responses, a series of safety nets to the value of €540 billion were agreed at Eurogroup.
These include SURE, the ESM’s Pandemic Crisis Support and the EIB’s pan-European guarantee fund.
All of these schemes are operational and the success of the SURE scheme in particular – with about 31 million jobs participating in the scheme – does I believe speaks volumes.
In addition, the agreement on ‘Next Generation EU’ (NGEU) was a ground-breaking achievement.
While I don’t have the time to go into too much depth, it will funnel several hundreds of billions of euros into transforming our economies through a mixture of grants and loans at exactly the point at which economic support is needed.
Third, it is also worth stressing the role that monetary policy has played through the pandemic.
The ECB was swift and decisive in its decision-making, through non-standard measures such as the ‘Pandemic Emergency Purchase Programme’.
The ECB’s actions have created a supportive monetary policy environment that has resulted in lower yields and has facilitated the flow of liquidity at these difficult times.
As we look to 2022, the Eurogroup reached agreement with unanimity earlier in the year on the need for supportive budgetary policy.
Our messaging on this has been clear and consistent. In simple terms, there will be no premature withdrawal of budgetary support.
We remain focused on the need to turn the current economic rebound into a balanced recovery. Increasingly targeted supports can help in this regard. And in this regard, draft budgetary plans for 2022 are being drawn up. These will be discussed at Eurogroup in the coming weeks and we will issue a statement on budgetary strategy towards the end of 2021.
Economic Governance Review
So now turning to the governance review and the fiscal rules. This is something that we will be closely involved with and I anticipate wide-ranging discussions on these topics in the coming months.
Eurogroup will play an important role in this process from both a euro area perspective, given the euro area specific elements of the framework but also more broadly given the importance of the rules themselves.
There are clearly a wide range of views and opinions on the rules and on the overall framework.
This is of course a challenging subject and I think compromise will be important.
At Eurogroup, we will be discussing the framework and we will issue a statement on budgetary policy later in the year.
What I can say, is that we are entering this debate from a position of strength given the level of coordination and consensus to date on budgetary policy.
Over the past few weeks, we have already seen arguments being put forward in relation to the governance review.
It is clear that some changes may be needed and that the framework needs to reflect the realities in which we operate.
But our starting point for this debate is robust. Our shared experiences in dealing with the pandemic has shown our ability to deliver both compromises and solutions.
So I have covered a fair bit of ground this morning and I hope the rest of your discussions go well.
To sum up, there are two key takeaways:
First, the Euro Area’s budgetary strategy to date has worked extraordinary well. We have seen this already over the summer months as our economies have re-opened. Growth prospects have improved and I believe will continue to improve.
That said, we need to remain vigilant and our supports will have to become more and more targeted, with budgetary policy remaining supportive next year.
Second, the fiscal framework despite its imperfections has worked well to date.
The early move to activate the general escape clause was a key decision. It highlighted the flexibility inside the current system.
Of course, improvements can always be made and the Commission’s governance review will be very important.
Within Eurogroup, we look forward to engaging in this process in the months ahead.
So thank you again for the invitation and I hope everyone enjoys the rest of the day and the week ahead.