Europe's Economy in Troubled Times

The event was introduced by Katie O'Connor, Konrad-Adenauer-Stiftung UK and Ireland and moderated by Noelle O'Connell, CEO, European Movement Ireland. This event examined the general economic outlook for the EU and the Eurozone including a focus on Ireland and Germany. The discussion explored the impacts of inflationary challenges and energy security, outlined EU and Member State responses, and assessed the future of the EU economy, including future fiscal rules and economic governance issues. 

The first speaker, Paschal Donohoe, Ireland’s Minister for Finance and President of the Eurogroup, began by highlighting some of the challenges the Eurogroup has faced in the past three years. He discussed the impact of Covid-19 and outlined the supports and safety nets implemented by Member States and the European Union. He noted that the Russian invasion of Ukraine has had a greater impact on the euro area, leading to both an increase in inflation and a decrease in growth. However, he stressed that the euro area continues to perform well, highlighting a record low level of unemployment across the 19 Member States. He emphasised the need to protect Europeans from economic hardship, but also the need to avoid introducing policies which add to demand pressures, and which undermine the single market.

Minister Donohoe also highlighted Europe’s significant investment needs, in order to support the digital transition and tackle climate change while also reducing the EU’s dependence on Russian energy supplies. He stressed the importance of European solidarity, and the benefits of policies such as RePowerEU and NextGenerationEU. Minister Donohoe concluded by highlighting the resilience of the Eurogroup to crises. He acknowledged that the euro area has a challenging future ahead, but that these challenges can be overcome through targeted supports and European solidarity.

The second speaker, Dr. Holger Schmieding, Chief Economist, Berenberg agreed with Minister Donohoe that the outlook for the Eurozone is challenging. He stated that Europe is facing a winter recession and highlighted low levels of consumer and business confidence in the markets. However, he highlighted that no later than next spring, the eurozone will see a significant decline in inflation, and that he expects a significant European economic rebound. He spoke about the state of play of the German economy, noting that effects of the recession will be felt to a greater extent in Germany than other eurozone countries, due to its outward looking economy and dependence on Russian gas supplies. He highlighted a potential shift in production from Germany to the US and Saudi Arabia in gas intensive areas in order to reduce its dependency on gas. While it may seem that the US will benefit from this move, Europe will benefit from changes in exchange rates, as the euro will rebound over time, whereas the dollar will remain stagnant. Dr. Schmieding noted that Germany is waking up to the effects of geopolitics and is becoming more aware of its approach to China and the concerns of its Eastern European neighbours. On the European level, he identified several forces which have unified Member States, such as the failure of Brexit, the misguided economic policies of former UK PM Liz Truss, and the aggressive foreign policy of Russia.

Dr. Schmieding discussed the role of the NextGenerationEU, and thanked Minister Donohoe for his role in shaping it. Some tweaks will be needed with regards to economic governance, such as more tailor made approaches to fiscal issues in Member States and an enhancement of the role of the European Fiscal Board. He accepted that there are challenges, but that the EU and eurozone are coping well with these crises. He stated the euro area is by in large on the right track, and urged the EU to continue supporting the economic recovery in Ukraine.

Minister Donohoe was asked what needs to be done to overcome the rising levels of inflation in the eurozone. He noted that the inflation rate is heavily influenced by the energy market and highlighted the need for an improvement in the price of energy and the need for affordability. He said that while policy interventions can address these obstacles, the ability to reduce inflation is highly dependent on the situation in Ukraine. On this, Dr. Schmieding also stressed the need for energy efficiency interventions and continued strong opposition to President Putin. He said that Europe is facing a ‘Putin inflation, not a home-grown inflation.’

Minister Donohoe was questioned about the future of economic support for Ukraine. He highlighted a high level of commitment to meeting the budgetary needs of Ukraine, and that there will be two phases of support, made up of short-term and long-term interventions. He expects that by the second week of December, the EU will be in a position to provide a support package worth billions of Euros to Ukraine.

Dr. Schmieding was asked about what the public perception of EU membership for Ukraine is like in Germany. He expects high levels of support, but not as high as that as in Ireland, as demonstrated in EM Ireland’s ‘Ireland and the EU’ 2022 Red C Poll. He stressed that the priority should be for Ukraine to join the single market, and which could attract greater levels of inward investment and would help with the cost of rebuilding after the war.

Asked by Noelle O Connell about enlargement of the eurozone, Minister Donohoe celebrated the fact that Croatia will be joining the eurozone from January 2023 and praised the efforts of the Croatian government to prepare for this transition. He welcomed the commitment of Bulgaria to adopt the euro but acknowledged the challenges that Bulgaria still faces in the process of joining the euro area.

Dr. Schmieding was asked about the state of play of the Franco-German relationship, given recent strains between President Macron and Chancellor Scholz. He stressed that strains in the Franco-German relationship are not uncommon, and that they will continue to work together to find joint positions and solutions. Minister Donohoe added that he is certain that France and Germany will reach agreement and find common ground. He also noted that despite the domestic challenges within each state, their continued efforts to find common ground at the EU level shows that they will always find a way of making their unique relationship work.

The issue of the future of economic governance in the euro area was raised. Minister Donohoe responded that in the short term, the priority should be the budget policy rather than just the budget rules, and to deepen coordination within the euro area. He also discussed the next steps relating to the European Commission’s communication which sets out orientations for a reformed EU economic governance framework.

Dr. Schmieding highlighted the importance and the durability of the European fiscal rules but noted that there should be greater flexibility within economic governance, and called for European ‘solidarity against some conditionality.’ Asked why Ireland seems to be hesitant in developing its offshore wind energy sector, Minister Donohoe responded that Ireland is trying to overcome this hesitancy, and that development of this sector provides an excellent opportunity for the Irish economy and its energy sector.

On a question about the legacy of Angela Merkel, Dr. Schmieding said that while he did not necessarily agree with them, her policies on Russia and on energy were based on consensus and were reflective of the opinions held by most Germans. He acknowledged that Merkel steered Europe through several significant crises and that Europe’s resilience could be credited to Merkel. Minister Donohoe noted that her contribution to Europe was vast and noted her efforts to find common ground with smaller member states.

Minister Donohoe emphasised the importance of reflecting on the challenges that arise from these crises, and on the opportunities that arise between these economic shocks. He concluded by stating that even during these hard times, there is still a case for optimism.

Noelle O Connell brought the proceedings to a close and thanked the speakers for their contributions, as well as the audience for attending. Support was expressed to Minister Donohoe in the upcoming election for the presidency of the Eurogroup. 

You can watch a recording of the event here