Check Against Delivery
Thank you to the IIEA for inviting me to participate in this webinar. The Institute has done an excellent job in maintaining discussion and debate over recent weeks.
Today I will speak to you about three issues:
- The scale of the economic challenge we now face;
- What a strong European and Irish economic response looks like; and
- The political impact of the crisis and how we might remake the global economy in response.
The COVID-19 pandemic constitutes an unprecedented economic and social challenge for Europe and the world, and is of such a scale that no nation can successfully address it alone.
In just a couple of months, the virus has spread to every continent, placing societies and health systems under deep stress.
The containment measures put in place to stem its spread have triggered a severe economic crisis.
The global economic landscape has been transformed, with the IMF forecasting global GDP to fall sharply by 3.0 per cent this year.
The EU economy has also been severely impacted, with GDP for the EU27 forecast to fall by 7.4 per cent, and in the Euro Area by 7.7 per cent.
At the same time, the United States economy has witnessed a historic rise in unemployment and government spending in response.
Congress has approved a $3 trillion bill to provide more aid to battle the pandemic and to stimulate the economy.
The Federal Reserve has mobilised an immense wave of liquidity, including over $2.3 trillion in asset purchases, effectively backstopping US financial markets.
The Bank of England has said the UK is facing its steepest decline since the Great Frost of 1709 and has committed to purchasing gilts.
Here in Ireland, we are projecting GDP to fall by 10.5 per cent this year, with unemployment expected to peak at 22 per cent in the second quarter.
A general government deficit is forecast to be in the region of €23 to €30 billion.
To respond back to this, the Government has already committed exceptional financial supports for workers and businesses, amounting to €13.3 billion or 7.5 per cent of gross national income.
We have been able to act decisively and proportionately because we managed our public finances with care in recent years.
And there is a clear reminder to us from our recent history. Some appear to be arguing that we make the same mistake about public debt for Ireland as was made about private debt a decade ago.
The low interest rates of today will not be the low interest rates of forever. That which is borrowed now will have to be either paid back or refinanced at a higher interest rate in the future.
The foundation of our economic stability is paying for our living standards - and our public services – ourselves. Central banks and savers in other countries will not pay for this decision.
So, over time and as our economy grows, we need to reduce our borrowing.
This recognition has enabled an economic response that has been unparalleled because Coronavirus is a crisis without precedent in the modern era.
There has been no playbook for governments to turn to.
Instead we have had to shape our response at break-neck speed, with incomplete information and unclear outcomes.
Putting large parts of our economy in suspension to deal with a public health crisis has posed a unique challenge to economic policy.
As the historian Adam Tooze succinctly put it recently, “An entire model of global economic development has been brought skidding to a halt, and it is easier, it turns out, to stop an economy than it is to stimulate it”.
Our first economic priority was to project incomes, jobs and companies through the pinnacle of the pandemic.
As we gradually reopen our economy, a different challenge confronts us – stimulating the recovery – and I will return to this.
But first, I will turn to the EU’s role during the crisis.
Actions at EU level to combat COVID-19
Coronavirus has demanded urgent, decisive and comprehensive action at EU, national, regional and local levels.
And while the EU was slow to respond in a co-ordinated way, it has since proven indispensable.
The economic response at EU level is based on three pillars that operate together.
Firstly, the immediate measures that were taken to enable Member States to support the economy, in the form, mainly, of the triggering of the general escape clause of the Stability and Growth Pact; a Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules.
The European Central Bank has also acted with great urgency, with the rapid launch of a Pandemic Emergency Purchase Programme (PEPP).
This is a new temporary asset purchase programme of private and public sector securities with an overall envelope of €750 billion, which when linked with previous announced measures will amount to €1 trillion.
The contrast with the ECB’s response to the global financial crisis is stark.
Second, the Eurogroup has put in place three important safety nets, for workers, businesses and governments.
This package comprises the Commission's SURE instrument to protect jobs and workers; the EIB’s Covid-19 pan-European Guarantee Fund; and the ESM’s Pandemic Crisis Support Instrument.
Taken together, this package of measures amounts to €540 billion and aims to minimise the short-term economic consequences of the COVID-19 crisis.
As we begin to move away from the containment measures necessary to deal with the health crisis, it is important to limit the economic damage and turn our minds toward recovery.
The third pillar is the ambitious Recovery Fund that will be part of an expanded EU budget to kick-start the economy.
The recently published Roadmap to Recovery by the Presidents of the European Commission and European Council highlights the need for significant investment to relaunch our economies where urgent action is required.
The Recovery Fund must focus on the most pressing economic needs to re-boot the economy once the health crisis has receded.
It should prioritise sectors and regions that have been most adversely impacted but also those that can generate, and enable, sustainable economic growth in the new normal of the post-Covid economy.
In particular, it should be deployed to accelerate both the digital and green transitions in the EU.
Equally, it, and other funding, must create a future for business models that are viable.
Work is continuing to develop its scope, scale and funding.
Next week, the European Commission will bring forward proposals on linking the Recovery Fund to the new Multi-annual Financial Framework.
Earlier this week, France and Germany made an important contribution to Europe’s recovery efforts with their proposal for how a Recovery Fund would work, based on the Commission borrowing €500 billion to provide to Member States through the EU budget.
Our citizens want, and expect, the EU to be ambitious and transformative in its response to this unprecedented crisis.
Taken together, the EU economic policy response meets these expectations, amounting in aggregate to nearly €2 trillion or 15 per cent of EU economic output.
My German colleague, Olaf Scholz, has suggested this proposal could be considered a ‘Hamiltonian moment’ for the European Union.
This year marks the 230th anniversary of the ‘Compromise of 1790’, when Hamilton persuaded Jefferson and Madison that the Federal Government should assume the states’ substantial Revolutionary War debts.
Hamilton famously described government debt as the ‘price of liberty’ from the US Revolution.
While what is being proposed today does not amount to mutualisation of debt within the EU, the ability of the Commission to borrow significant sums to finance EU budget programmes would, if it is agreed, represent a significant step forward in European integration.
I believe that primary responsibility for management of our economies should continue to rest at national level.
However, given the scale of the crisis and in solidarity with those worst hit, the Government has been strongly in favour of measures that go beyond ‘peacetime’ economic policy or positions.
Of course, these are proposals from two Member States.
Agreement on a way forward will require the approval of all 27.
We will engage positively in the discussions and work with our partners to build consensus for early agreement. There are issues and matters that need careful work.
However, the fact that proposals are being considered now, which only a matter of weeks ago would have been dismissed out of hand, demonstrates how the scale of the pandemic has overturned previous economic certainties.
It is also a riposte to those who argue that the EU lacks the commitment or political will to meet the unique economic challenges posed by the Coronavirus with proportionate fiscal action.
Such a proportionate response has been necessary, because the scale of this crisis has raised questions about international cooperation – and therefore organisations such as the European Union.
The political impact
Recent opinion polls have seen a drop in EU support in countries most affected by the pandemic.
There has been criticism of the both the EU’s response to the pandemic itself and the ensuing economic crisis.
The scale and speed of the pandemic undoubtedly impacted on the EU’s ability to respond at first.
However, this has given way to a concerted response to tackling the public health and economic aspects of this crisis.
There have, of course, been differing views among us on the right approach to take.
This discussion and debate reflects the nature of our democracies.
We have seen comments that the EU is ‘having a bad crisis’ and predictions that international cooperation and globalisation may fall victim to the pandemic.
We have seen such predictions before, after the global financial crisis a decade ago, the migration crisis or more recently after the Brexit referendum in the UK.
On each occasion these predictions have been proven wrong.
A project based on maximising the benefits of interdependence is surely the strongest foundation for dealing with challenges that are by definition multilateral.
However, the pandemic has revealed vulnerabilities in the global economy and international politics.
It has struck at a time when the anchors of globalisation and mutual interdependence were already under sustained pressure.
We have seen the flare up of geopolitical tensions between the US, China, Russia and others, amid competing visions for the global economy and calls for de-globalisation.
The complexity of the global economy and financial system have led many to see interdependence as a weakness.
In seeking to provide an intellectual framework for these shifts, the Irish political economist, Henry Farrell, has developed the concept of ‘weaponised interdependence’, which is the use of commercial relationships for national political objectives.
If the last economic crisis demonstrated how the interdependence of financial systems created higher risks, maybe this crisis is demonstrating how the interdependence of supply chains is now creating risks.
The pandemic has revealed vulnerabilities in the way supply chains are structured, for example, impacting on the production and delivery of medical equipment and devices for our health services.
Complex supply chains have been disrupted, with knock on effects for both manufacturers and consumers.
Undoubtedly, we will see a re-evaluation of how parts of the global economy are structured as we emerge from this crisis.
In particular, we must acknowledge that the existing model of globalisation, for all its benefits, created vulnerabilities for citizens and states.
The answer lies not in rejecting globalisation but by building a better global system that mitigates the risks of economic and political dependency.
What does this mean for how we restructure the global economy?
Rather than seeking to unravel globalisation or pronounce its demise, we should work to adapt it to ensure a more resilient global economy, through diversifying supply chains and manufacturing, working to reform the WTO, measures to improve competitiveness, and investment in innovation, research and development.
In the process there will be a need to reassess the balance between the efficiency of supply chains and their resilience. We have seen this balance work well in some areas, for example, in many of our food retailers.
In practical terms, this means working toward what Commissioner Hogan calls greater ‘strategic autonomy’ in key areas such as the production of medicines and medical devices.
And amidst this change, Ireland will, again, identify strategic opportunities and pursue them. As a country that is deeply embedded in global and European supply chains I recognise that this potential for change is a significant development for Ireland.
But, with an economy that is based on expertise and diversity, I am confident that this is an opportunity that we can rise to.
We need to do this with care, so that Ireland and Europe do not replace one vulnerability with another, or risk fragmenting the global economy.
This could easily erode trust between key global partners that could undermine peace and security or inhibit our ability to work together to tackle global challenges such as Coronavirus, but also climate change and migration.
An open trade policy remains at the core of our recovery.
As a small open country, which is integrated to the global economy, Ireland has experienced the benefits of international trade and multilateralism.
We will all be the poorer if the global economy fragments under the weight of this crisis and we retreat behind national and regional walls.
We will rise to this challenge, at the time of Brexit, meaning that period ahead must be used not only to respond to Covid-19 but to ready ourselves and our economy for this challenge.
I firmly believe that the present crisis highlights, more than ever, the value of the European project and of the importance of international cooperation in responding to a pandemic that does not recognise borders, and whose impact does not depend on a country’s size or economy.
The virus has increased uncertainty in our already complex and interdependent world. We need more international cooperation and understanding, not less, if we are to tackle this successfully.
If we think of the pandemic as a common experience, then we can find the common ground necessary to work together to support a coordinated health response, search for a vaccine, reopen our societies and rebuild our economies.
As we look ahead, I will continue to make the case that the best way for Ireland to achieve this is to work with our EU partners, within the context of the strong relationships we have within and beyond Europe.