energy aids? “There is a risk that they will fuel inflation further”

Paschal Donohoe is basically a friendly person, but when he comes to talk to WELT, he seems particularly in a good mood. He has every reason to do so: the day before, the finance ministers of the euro countries re-elected him to chair their group, the Eurogroup.

That is unusual: the chairman is actually one of the 19 finance ministers in the group. Donohoe is expected to step down in mid-December. However, his colleagues appreciate his work in the group so much that they have made an exception: in the future there will be two Irish people in the group: Donohoe and the future Irish finance minister.

After the conversation, the politician says goodbye and hurries out of the conference room into the corridors of the Council building in Brussels. The next round of talks with his counterparts is pending; it is about the reform of the debt rules for the euro zone.

WORLD: Congratulations on your re-election. Your second term begins in turbulent times. The euro zone is probably already in a recession and companies and households are groaning under rapidly rising prices. Is the European Central Bank doing enough to combat high inflation? Other central banks started raising interest rates earlier and are doing so much more aggressively.

Paschal Donohoe: Yes they are. And I have full confidence in the European Central Bank that it will take the appropriate action when the time comes. The level of inflation and its composition are not the same everywhere and the central bank takes this into account. Inflation in the euro area is mainly being driven by the energy price shock and not so much by high demand, which drives up prices. The ECB made the right decisions and will make the right decisions.

WORLD: Monetary policy is doing its part, but experience from past periods of high inflation shows that central bankers need the help of finance ministers.

Donohoe: That's right. I very much support the work of the ECB, but I believe that fighting inflation is not their sole responsibility. Eurozone governments now need to play their part in the budget decisions they will be making in the coming year. Were it not for the energy price shock, we would only be talking about the coordination of fiscal and monetary policies. But fighting inflation is particularly challenging at the moment because we have to coordinate monetary policy, budgetary policy and, in addition, energy policy. Coordination is therefore more complex than in past periods of high inflation. But I believe we will master this task.

WORLD: Nice that you have recognized the need, in the European capitals there has apparently been a lack of insight so far. National governments are outbidding each other on aid programs, watering hundreds of billions to help homes and businesses cope with high energy prices. This counteracts the tighter monetary policy. It seems that politicians are reluctant to admit that hardship is needed in the fight against inflation and that some groups will lose in the fight against inflation.

Donohoe: We recognize the need to bring inflation down and are ready to do so. But the energy shock is so powerful that not only is it threatening incomes, but jobs as well. Of course, it is understandable that governments have acted to protect jobs and offset Russia's weaponized use of energy. Fiscal policy in the euro zone has given additional impetus to the economy and inflation this year. We are in agreement among the finance ministers of the euro zone. And we have committed ourselves to pursuing a neutral financial policy course next year, i.e. not to provide any additional stimulus to the economy.

Because one thing is clear. If the energy aids that national governments have been developing in 2022 continue into the coming year and beyond, and if they remain unchanged in design and scope, they risk fueling economic activity and inflation further. Preventing this will be our task for the beginning of next year. Maintaining this balance will be particularly important in the first half of next year.

WORLD: That will be difficult enough. Some member states are now even calling for new joint EU debt to be incurred in order to support financially less strong states with energy aid.

Donohoe: The resources available are sufficient to respond to the current challenges. Some governments are publicly calling for new funding models and new funding. But the only consensus that currently exists at finance minister level and the only agreement that exists covers existing budget instruments and the Corona recovery program NextGeneration EU. There is currently no political consensus on anything beyond NextGeneration EU. With the REPowerEU program, the EU has already reallocated funds from the Corona recovery fund to coping with the energy shock.

WORLD: There are now also considerations of reacting to the Inflation Reduction Act in the USA with new EU subsidies. There are even calls for such subsidies to be financed with new common debt at EU level.

Donohoe: We already have a very comprehensive and extensive system of grants under the NextGeneration EU recovery program. It would be a loss for all of us if we started a subsidy competition with the US. Taxpayers' money is precious and we already have highly efficient industries in Europe. That's why it's important to focus on trade diplomacy first. Eurozone finance ministers and I will await the outcome of the talks with the US before forming an opinion and considering whether further action is needed.

WORLD: One last question: In this delicate situation, it will be difficult for the EU member states to agree on new debt rules for the euro zone. Federal Finance Minister Christian Lindner has already said that he does not share the Commission's current ideas.

Donohoe: Yes, the timeline for reforming the fiscal rules is challenging. But by next March we need to have made significant progress when it comes to how the Stability and Growth Pact is going to be applied in the future. The simple reason for this is that in the second quarter of 2023 governments will make important decisions for their budget plans for 2024. The time frame is tough and demanding, but we really have little choice. We have a lot of work ahead of us in January, February and March.

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