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On Thursday, May 13, Paschal Donohoe joined Markus’ Academy for a conversation on the future of Euro area fiscal policy rules & standards, divergence between European and US fiscal policy, international tax competition, financial stability threats, Brexit implications (esp. financial services), digital currencies & the role of currency/finance in the climate transition. Donohoe is Ireland’s Minister of Finance and president of the Eurogroup.

Watch the full presentation below. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

  • The level of budgetary intervention currently in the euro area economy and support from the ECB is the right policy response to the challenges from the pandemic. While a rebound will result in increased growth in the latter half of the year, we need to recognize that a rebound is not the same as a full recovery. As we move through 2022, the economic support levels will change from general to more sectorally focused and also the magnitude of support at the national level will change.
  • The European Recovery Fund is a temporary, emergency instrument, and a massive intervention. This is channeled to parts of the EU that are most at risk from COVID. Own Resources are common taxes where the revenues go to fund the EU and the debate around which is changing due to the recovery fund and COVID. On the issues of fiscal rules, these are EU wide and they sit with ECOFIN. At Eurogroup, I have invested in building up consensus on the appropriate budgetary policy in the Euro Area. On the difference between fiscal rules and standards, I think the architecture will remain rules based in the future. The Commission is planning public consultation on this later in the year. Managing debt sustainably will always be a high priority in the EU since commitments are high due to a shared currency. Concerns around the EU social contract will re-emerge once the pandemic recedes and recovery funds will be vital to that.
  • The world of corporate tax policy will change with the increasingly globalized economy.  There have been  massive changes in corporation tax policy in Ireland in recent years. It is not just big economies that want to change tax policy and be competitive. It will be a challenge to implement carbon border adjustment levies in a synchronized manner while optimizing global trade flows with economic fragility.
  • We need both ESG framework and public capital to combat climate change. ESG is needed to fundamentally change incentives within the EU. Climate change will – and may have already – become a financial stability issue and impact how companies can organize themselves and affect transmission of monetary policy. The carbon pricing and taxes should level the playing field of investment decisions on carbon intensive vs green projects in the present and future.
  • The digital euro could protect the monetary sovereignty of the Euro area. If the Euro has a digital future, it could strengthen the international role of the Euro as a reserve and global currency. However, the main driver of the e-euro project is to ensure that central banks and sovereigns ensure that the fiat currency is responsive to technology, innovation and the greater digitalisation of daily life, for the benefit of citizens and businesses. While digital innovation and the role of the private sector will be important to transaction implementation, the ability of sovereigns to be economically effective depends on how they define and regulate the supply of money.
  • The EU enriches us. Brexit has benefited the Irish financial sector but has had consequences for agriculture exports to the UK. The implementation of Brexit highlights the dangers of simple claims and the importance of continually making the case for social and political acceptance of important issues e.g. the EU. Donohoe ended with a quote from Hannah Arendt’s book The Origins of Totalitarianism: “The stability of the laws corresponds to the constant motion of all human affairs, a motion which can never end as long as men are born and die.”