Speech by Minister Paschal Donohoe - Unlocking the potential of the euro area’s economic landscape

Address at Sciences Po, Paris - ‘Unlocking the potential of the euro area’s economic landscape’- by Minister for Public Expenditure and NDP Delivery and Reform, & Eurogroup President, Paschal Donohoe

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Good afternoon. It is a real pleasure to be here with you in this renowned institution to share my thoughts on how we can unlock the potential of the euro area’s economic landscape. My warmest thanks to Professor Saraceno and the faculty at Sciences Po for hosting me today.

I will deliver my remarks in my capacity as President of the Eurogroup, but first I’d like to mention that I am in Paris today as part of a global programme of engagement by the Government of Ireland to mark St Patrick’s Day.

Each year, members of our government travel overseas to celebrate the strength and richness of Ireland’s bilateral relationships with other countries. France is Ireland’s closest neighbour in the European Union, and the ties that bind our two countries extend back centuries; from the support that France gave to Ireland’s cause of independence, to vibrant contemporary cultural connections, educational exchange and growing trade.

So I am delighted to have the opportunity to celebrate the richness of the partnership between France and Ireland, and I’m particularly pleased to do so in front of an audience of French and Irish students who are its living proof.

The theme for St Patrick’s Day 2024 is ‘Ireland’s future in the world,’ which focuses on young people and our Diaspora, their perspectives about the world of the future and Ireland’s place in it. In my role as President of the Eurogroup, I would therefore like to expand on these themes through a wider lens – to think a bit about the world of the future and our place in it as Europeans. And I particularly look forward to taking your questions and hearing your perspectives later on.

When I talk about the world of the future, and unlocking the potential of the euro area’s economic landscape, I’d like to start with the near-term – by thinking about the next five years.

As I scarcely need to recall before an auditorium of political science students, the European elections will take place in just under three months’ time. From the sixth to the ninth of June, in one of the world’s largest democratic exercises, European citizens will go to the polls to elect a new European Parliament. Once formed, the new legislature will then elect a President of the European Commission and approve a College of Commissioners – which will set out a new legislative programme for the next five years.

Electoral cycles afford us an opportunity to reflect on our recent lived experiences in society and our hopes for the period ahead. What we expect and hope that Europe can deliver for us will be on our minds as we cast our ballots in June.

The late Jacques Delors – one of the many great French architects of European integration – who said that the idea of Europe is a dream, but a dream that is becoming a reality.

And indeed, both the potential and the reality of Europe have never been so clearly demonstrated than in recent years.

Since the last European elections in 2019, we have been confronted by a global pandemic, the tragic outbreak of war on the continent of Europe with Russia’s invasion of Ukraine, and a cost of living crisis that arose from energy prices pressures that, in turn, morphed into broader inflationary pressures.

In response to each of these shocks, Europe acted with decisiveness and unity, putting forward innovative solutions to deliver what European citizens needed. This was the case with the common procurement and distribution of COVID vaccines. And the decision to the establish the €750 billion Recovery and Resilience Fund to support Member States’ investments in health, digitalisation and climate resilience to build back post-pandemic.

Economic policy was extraordinarily supportive and coordinated through this period – both budgetary and monetary policy worked together – through tax and welfare supports, through subsidies and through low interest rates.

European governments borrowed heavily through these testing times to protect lives and livelihoods and these policies worked. Our economies bounced back and recovered strongly once the pandemic restrictions were eased with the euro area growing robustly up until the war in Ukraine.

The tragedy of war on our continent is something that we have faced every day for the past two years. Our support for Ukraine is steadfast and resolute. Since the start of the war, the EU and its Member States have provided relief and assistance to Ukraine worth over €88 billion. And last month the European Council agreed an additional €50 billion support package.

Finance Ministers have also worked together in combatting the cost of living crisis that stemmed from Russia’s weaponisation of energy supplies. Over the last two years, euro area governments have borrowed to provide cost of living supports – with supports averaging close to 1.6% of euro area GDP over the past 2 years.

Even in the face of a war and cost of living pressures, our economies still managed to grow last year – modestly, yes, but still positive. The euro area did not enter a recession as many had expected, which has been a testimony to our economic resilience. Our labour markets continue to be exceptionally strong with record low levels of unemployment (6.4%) and record high rates of labour market activity.

We have also managed to bring inflation down, from rates of 8.5% just a year ago to 2.6% in the euro area in February. All of this is a tangible expression of the potential and joined up policy coordination in Europe, its agility and ability to be bold in times of crises as well as a reminder of just how much can change over the course of five years.

So what about the next five years?

It is fitting to recall that as early as 1949, Jacques Rueff, a former director of Sciences Po, said that Europe will be united through its currency, or it will not be united at all.

It may have taken 50 years from when he said those words to turn this dream into reality, but since its launch in 1999, the euro has come to serve as the bedrock for many of our shared priorities and an integral part of our economic security and prosperity.

I believe it is through an effective economic response to the major challenges that we face that we will unlock the full potential of the euro area economy.

So what does that entail, and how does the work of the Eurogroup fit in?

I see three interconnected strands from my perspective as President of the Eurogroup:

• coordination – how we work together as Member States to coordinate our economic policies in response to economic and financial developments
• competitiveness and capital markets – how we reinforce the economic performance of the euro area and its position in the global economy through promotion of structural reforms and investments that foster growth, while also contributing to the goals of the green and digital transitions; and
• the future of our currency – how we think about our future in a world which is becoming more and more digitalised, and in the context of an enlarging European Union

Our work programme for the first half of 2024 is centred around these three areas but I believe that they also reflect the longer-term economic challenges facing the euro area and the EU more broadly.

I’ll expand on each of these areas in a bit more detail now.

Growth and Safe Finances

First, on coordination.

The euro area economy’s first challenge is to chart a course for sustained economic growth and prosperity in the period ahead. This will allow countries to return to a more normal level of borrowing and expenditure.

This is no small feat given the scale of the shocks we have faced these past years. Nevertheless, if we don’t have strong foundations, the house we have built will not weather any storms that are on the horizon.

For example, due to the recent significant increase in interest rates, euro area countries now face higher borrowing costs on newly issued debt. So this means we face a choice of spending less or increasing revenues.

The euro area’s debt-to-GDP ratio is on a declining trajectory and should fall below 90% this year. Deficit levels are also decreasing – from 3.6% of GDP in 2022 to 3.2% in 2023, with a further decline to below 3% forecast by the end of this year.

This shows we are delivering on our collective commitment in the euro area to restore public finances to a sustainable trajectory. Furthermore, we have just agreed on an ambitious and comprehensive reform of the EU’s economic governance framework – it aims to encourage Member States to implement the measures needed for the green and digital transitions, strengthen economic and social resilience and bolster Europe’s security capacity.

This will help bolster the growth outlook in the years ahead.

While I am conscious that uncertainty remains exceptionally high – not least due to geopolitical tensions – I am confident that the conditions are in place for an upturn in growth in 2024, and I’d expect GDP to average close to 1% this year and 1.5% in 2025.

And crucially, we will achieve this while also ensuring safe finances and that we reinforce our resilience and capacity to face shocks in the future.

Where we do need to make more progress, though, is in terms of Europe’s productivity. This leads me to a key focus of the Eurogroup work in past months – the state of European capital markets, the interplay with European competitiveness and our priority areas for reform.

Competitiveness and capital markets

Second, are all cognisant of the scale of the challenges we face. Europe, as a continent, has an aging population, which places growing demands on our welfare systems. We have set ambitious carbon neutrality objectives that require large investments. We will need to carefully respond to the opportunities and risks posed by new and emerging technologies. And we have seen a significant response from public investment in response to the twin crises of the COVID-19 pandemic and Russia’s war on Ukraine.

The onus of financing cannot rest solely upon the public purse. We will need to boost our capital markets and unlock sources of private financing to support our public actions.

By enhancing our competitiveness through structural reforms and deepening Europe’s capital markets, we have the potential to unlock new sources of financing for the challenges we face as a continent.

This is why the logical focus is to ensure that the EU’s ambition to have a true Single Market for capital becomes a reality.

Let me explain why this is so important. If one or more of you here this evening have an innovative business idea, at some stage you will need capital to bring your product to market. If your first thought is to go to your local bank to get a business loan – you would be like many other European businesses.

Banks are a much larger part of the financial system in Europe than say in the US, for example; accounting for approximately 62% of total market assets across the euro area compared to just 29% in the US.

But banks can be conservative in their lending and restricted to serving their national market.

You might also think about seed capital, venture capital and private equity. But the main players in this space tend to be US firms or public agencies.

The European equity market is also fragmented compared to the US: it is less than half the size of that of the US market, but has three times as many exchange groups; more than 10 times as many exchanges for listings; more than twice as many exchanges for trading; and roughly 20 times as many post-trade infrastructure providers.

In practice, this means that it is difficult for you as a prospective business owner to access financing from the capital markets. This in turn makes it more difficult to develop and find funding for innovative projects. The result is that we see European businesses looking outside the EU to scale up.

Capital markets are also about creating better opportunities for savings. Households in Europe mainly save and invest through banks and insurance companies. Of course, there is nothing wrong with investing in this way – but we want to find ways to provide new opportunities for savers and investors to invest – safely – in innovative companies and projects they believe in, across the whole of the EU.

So what are we doing about it?

Yesterday, in the Eurogroup meeting I chaired, all EU Finance Ministers agreed to a common vision on the future of Capital Markets Union. This expresses the political will and commitment of all twenty-seven EU Member States to step up efforts to make concrete progress in the months and years ahead.

The Eurogroup statement has set out three priority pillars of action, around the rubric of ‘ABC’:

• A for Architecture – that is, how we can reduce barriers, how we can develop a better regulatory and supervisory system that works for businesses, investors and savers
• B for Businesses – ensuring that businesses, especially SMEs looking to grow quicker, have access as well as the knowledge and capacity to benefit from the appropriate funding to grow and remain competitive in Europe
• and C for Citizens – all of you. How we can create better opportunities for you to save for your future projects, investments and retirement, and facilitate access to capital markets for retail investors

Our statement identifies areas of political consensus where the legislative energy of the next Commission could be directed. And it has also identified measures which could be taken at the national level, to further develop and deepen our capital markets.

So where do we go from here?

As a first step, I will present this statement to EU leaders at the Euro Summit next week. We need political ownership at the highest level as we set out policy priorities at European and national level.

This will also mark the start of a process of regular follow up at the political level. We must challenge ourselves to keep the political pressure high so as to maintain our common direction of travel on this key issue, which is at the heart of the competitiveness of each and every Member State, as well as the EU collectively.

I’m optimistic about our prospects for making progress, precisely because I recognise the unity of ambition around the Eurogroup table.

And I encourage you all to engage with this project. As I hope I have made clear, the cost of not doing anything here is higher than ever before. And while developing Europe’s capital markets may sound like a lofty goal, we can all play our part – to develop our understanding of how capital markets work, and how we can better fund our futures.

Enlargement

Before closing, I’d like to say a brief word about future enlargement of the European Union and the implications that holds for Europe’s Economic and Monetary Union.

It is clear that enlargement will be one of the big issues for the next legislative cycle. We have made commitments to our friends and neighbours – commitments which will bring them into our EU family, with all the benefits and responsibilities that this brings. And while we know that these debates will bring challenges, we have seen the extraordinary results of the growth of our European Union and the tremendous potential that further enlargement will offer.

This brings me to the final ‘c’ which I mentioned at the start: the future of our currency.

At the end of this week, I will travel to Sofia to discuss Bulgaria’s path to euro area accession. Last year we saw Croatia become the twentieth member of the euro area.

And I am conscious of debates that are taking place in other Member States, which recognise the euro as an essential part of Europe’s economic security fabric, providing greater financial stability and economic prosperity for its members.

Further enlarging the euro area, however, will require us to further strengthen our economic foundations. And so we have a responsibility to ensure a well-functioning economic framework with a clear commitment to sound public finances, a well-functioning banking system, a fully-fledged capital and financial markets union, and a euro area at the forefront of digitalisation to make sure that all our citizens can reap the benefits. It is through continued work in all these areas that the Eurogroup can contribute to unlocking the potential of the euro area’s economic landscape.

I have shared with you today some of my thoughts about the world of the future and what we need to be thinking about today to make sure that the Europe of tomorrow is delivering for its citizens through growth, jobs and quality of life, while at the same time playing its part on the international stage.

I really look forward to taking your questions now and to hearing your views on your future and where we are headed. But before we move into Q&A, I would just like to take a quick moment to address the students in the room in particular.

I hope you all feel a sense of pride in the research and learning that you are all part of. Sciences Po has earned the international prestige it holds today thanks to the superb faculty and also all of you and the work you do.

I know many of you will consider a career in public service, whether at local, national, European or international levels. I encourage you to do so. The projects and challenges I discussed this evening will only move forward with the sharpest minds and most generous of spirit.

And finally, one public service announcement, though I imagine I have a receptive audience: I encourage you all to make your voice heard and vote in the European Parliament elections in June.

Thank you.