“Cautious but Justified Optimism” – Eurogroup President Paschal Donohoe Confident about Economy of the European Union

Paschal Donohoe, Irish Minister and President of the Eurogroup, expressed optimism at a joint event of the Bertelsmann Stiftung and the Irish Embassy in Berlin: the EU is much better prepared in the face of the current difficulties in the banking sector than it was in 2008 and is in a position to make the right decisions.

“Off Course or On Track? The European Union Amidst Major Economic Challenges” was the title of the event on 16 March at the Berlin office of the Bertelsmann Stiftung. In his opening speech, Malte Zabel, Co-Director of the Europe’s Future programme, listed some of the current challenges facing Europe’s economy: the turmoil in the banking sector, supply chain problems, the economic consequences of the Russian war of aggression, the need for digitalisation and decarbonisation, as well as outstanding “evergreens” such as the further development of the Single Market, the reform of the Stability and Growth Pact and the completion of the Banking and Capital Markets Union.

Despite these immense, parallel challenges, Paschal Donohoe was optimistic in his keynote, drawing historical lines. Ireland, which this year celebrates the 50th anniversary of its EU membership and which marked a century of independence from the UK in 2022, and Europe had managed time and again over the last century to overcome critical phases by making the right decisions and to get to the point where we are today. Now Ireland is part of a united European Union with high approval ratings among its citizens. “Progress is always possible, especially in times of crisis,” he concluded.

In a subsequent fireside chat, Katharina Gnath, head of our Europe’s Economy project, interviewed the minister about the current economic difficulties and started with the topic that is currently dominating the headlines: the bankruptcy of the Silicon Valley Bank, the problems of Credit Suisse and the possible impact of both on the euro area. Donohoe was convinced of the effectiveness of the measures taken after the 2008 financial crisis. European banks are in a much better position today in terms of equity and liquidity than they were a few years ago. The rating agencies have also improved considerably. In this respect, he argued, the Eurozone is safe, even if spillovers can never be completely ruled out. Notably, just before the event, the European Central Bank had raised the key interest rate by 50 basis points, indicating confidence that the European banking system would be strong enough to handle higher interest even in the current situation.

With regard to the general state of the European economy, Donohoe believes the Eurozone has a high degree of resilience. Despite the after-effects of the pandemic and the shocks caused by the war, the forecasts for this year point to slight growth, and a severe recession has been successfully averted. Against this backdrop, some member states had already begun to slowly phase out their expansionary fiscal policies. As a result, 2023 would be a year of transition before the requirements of the Stability and Growth Pact (SGP) would take full effect again in the medium term.

Regarding the reform of the SGP, which was actually scheduled for this year, Donohoe admitted that there was not yet sufficient consensus among the member states. Nevertheless, efforts are being made at all levels to push the project forward as far as possible this year. There were also no majorities for a permanent NextGenEU fund or a comparable new instrument to strengthen the resilience and investment power of the European economy. Before such a discussion could be held in earnest, Europe would first have to prove that it could successfully use the resources from the current fund, which had not been exhausted and may not be for a long time.

Finally, Donohoe and Gnath also reflected in their discussion on the European Single Market, which celebrates its 30th anniversary this year. In view of the global geopolitical competition and the transition to a digital and sustainable economy, other instruments, especially investment promoting instruments, are needed more now than they were a few decades ago. However, this should not lead to a fragmentation of the internal market. The response to the American Inflation Reduction Act as well as further European regulatory acts to promote green and digital NextGen innovations must be such that fair competition prevails internally, and no new imbalances arise in the Single Market.

Donohoe concluded with the same message he began with: optimism. The Single Market is an outstanding achievement, he said, and the EU has all the strength it needs to develop it further in the way that today’s times demand. To close, he reflected on the current narrative of a poly- or permacrisis situation, remarking that the Eurozone saw a stronger post-pandemic recovery than the United States or China. He proposed that these frequent and interlinked crises are also being met with more robust recoveries. Only time can tell if this trend sustains, but Donohoe asked we consider this optimistic counternarrative.