As a small open economy Ireland’s financial fortunes are largely dependent on international trade and influenced by global markets.
That makes the nation economically vulnerable, but being part of the European Union allows Ireland to utilise the combined power of 27 Member States to punch above its financial weight.
EU membership has helped Ireland transition from economic stagnation in the middle of the last century to becoming a nation with a modern economy based on free trade, foreign investment and growth.
The EU’s Single Market environment, together with decisions such as the introduction of low corporate taxes and the development of an Industrial Development Agency (IDA Ireland) to promote Ireland abroad, have enabled the new Irish economy to flourish.
It hasn’t been all plain sailing though. Ireland’s strongest period of economic growth, from the mid ‘90s to the mid ‘00s, was followed by a spectacular crash sparked off by a worldwide financial meltdown.
However, with assistance from the EU, Ireland’s economy recovered and several powerful measures were introduced to better protect the economies of Ireland and all Member States.
The latest challenge to global economic stability is the impact of the Covid-19 pandemic and the European Union has agreed a recovery package to boost the 2021-27 European budget and repair the economic damage.
The European Commission will manage the Next Generation EU €750 billion recovery fund and ensure the €1,074.3 billion Multiannual Financial Framework (MFF) budget powers a resurgence that reflects the Commission’s European Green Deal roadmap for a sustainable economy and accelerates the digitalisation of Europe's economy.
Economic and Monetary Union
The Economic and Monetary Union (EMU) helps integrate EU economies so they can provide stability and stronger, more sustainable, inclusive growth across the EU to improve the lives of EU citizens.
It involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro.
All EU Member States are part of the economic union but some, including Ireland, that have adopted the euro, are collectively called the Euro Area or Eurozone.
Ministers from Euro Area Member States discuss matters relating to the currency in the Eurogroup and Ireland’s Minister for Finance, Paschal Donohoe, was elected its President in July 2020.
Responsibility for economic policy within the EMU is divided between Member States and EU institutions including the European Commission, which monitors performance and compliance.
The European Central Bank is the EU institution responsible for implementing an effective, closely coordinated, monetary policy for the euro area, with the objectives of price stability and safeguarding the currency’s value.
National governments control other economic policy areas including fiscal policy that concerns government budgets, and tax policies that determine how income is raised.
Launched in 1992, shortcomings in the EMU and the EU’s financial systems were exposed during the global economic crisis that hit Europe in 2007.
As a result, action was taken to make the Euro Area architecture more robust and the economic and fiscal policies of Member States are now coordinated through the European Semester.
But more work needs to be done to ensure financial sustainability throughout the EU and the European Commission 2019-2024, led by President Ursula von der Leyen, has made developing an economy that works for people a top priority.
Amongst the Commission’s aims are to further deepen EMU and to strengthen small and medium-sized enterprises (SMEs), the backbone of the EU’s economy.
One of the EU’s key responses to the global economic crisis of 2007 was the development of the Banking Union, which applies to countries in the Euro Area but other Member States can also join.
The Banking Union strengthens Economic and Monetary Union and creates a more transparent, unified, safer market for banks.
The Single Rulebook helps protect depositors by ensuring banks behave prudentially and that action is taken quickly to prevent banks from failing.
The SSM is a system of banking supervision for Europe by the ECB and the national supervisory authorities of the participating countries, including Ireland.
Its main role is to detect weaknesses in the banking sector and ensure action is taken to prevent problems developing into threats to overall financial stability.
The SRM is designed to respond quickly and effectively to failing banks with minimum costs to taxpayers and the economy. Its main decision-making body – the Single Resolution Board - can resolve a failing bank over a weekend utilising the Single Resolution Fund (SRF) that banks and investment firms contribute to.
Creating an economy that works for people is one of the Commission’s top priorities, and that includes completing the Banking Union.
The Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is responsible for the Commission's policies on banking and finance. Its objectives include building a well-regulated and globally competitive single market for financial services.
This Capital Markets Union (CMU) will mobilise capital in Europe and channel it to companies, including SMEs, and infrastructure projects that need it to expand and create jobs.
The European Commission has also proposed a European deposit insurance scheme (EDIS) for bank deposits in the euro area that would be a third pillar of the Banking Union.
This would provide better insurance cover in the euro area than the Deposit Guarantee Schemes Directive (DGSD) that currently ensures deposits up to €100,000 are protected.
A key tool in EU economic policy coordination is the European Semester. It allows EU Member States to discuss their economic and budget plans and monitor progress at specific times throughout the year.
The Semester, introduced in 2010, takes place after the publication of the Commission’s Annual Growth Survey, which usually takes place in November.
Member States still have complete autonomy to implement their own financial policies and tax regimes but the Semester ensures they keep within an agreed set of rules called the Stability and Growth Pact (SGP).
The SGP is designed to ensure that countries in the European Union pursue sound public finances and coordinate their fiscal policies.
In the first Semester cycle of its mandate, the von der Leyen Commission presented an ambitious, rebooted growth strategy that places sustainability and social inclusion at the heart of the EU's economic policymaking.
The Annual Sustainable Growth Survey draws from priorities enshrined in the European Green Deal and it’s designed to help the EU and its Member States achieve the United Nations Sustainable Development Goals.
The Multiannual Financial Framework (MFF) is the budget that determines how much the EU can spend over a seven-year period.
The MMF is used to implement the EU’s internal and external policies and the 2021-2027 budget, worth €1,074 billion, was approved at a special summit in Brussels on July 21, 2020.
The Brussels summit also agreed to boost the MMF with an additional €750 billion fund to address the challenges posed by the COVID-19 pandemic through Next Generation EU.
The amount each country contributes to the MMF is calculated fairly, according to means. Ireland was a net recipient of the MMF for its first three decades of EU Membership and is now a net contributor.
However, the EU budget doesn’t aim to redistribute wealth, but rather focuses on the needs of Europeans as a whole and Ireland’s access to the Single market is estimated to be worth €30 billion annually, substantially more than its contributions.
Next Generation EU
The Next Generation EU (NGEU) is an extraordinary €750 billion recovery package that will help the EU to rebuild after the COVID-19 pandemic.
NGEU reinforces the 2021-2027 MMF as while the recovery effort needs to be quick and effective, it will only be sustainable if it is linked to the long-term budget.
The European Commission is empowered by the Own Resources Decision to borrow funds on the capital markets on behalf of the EU for the NGEU.
Around €390 billion will be made available through grants, most of which will form the EU’s Recovery and Resilience Facility (RRF).
Most of the rest of the NGEU funding will be made available, again through the RRF, to EU countries in the form of loans, which can be paid back at favourable rates when economies recover.
The NGEU can help deliver a green, digital and resilient recovery that will help achieve the European Commission’s six priorities for 2019-24.
Ireland's pandemic recovery
Europe’s recovery from the financial consequences of the Covid-19 pandemic is of vital importance to Ireland’s economic interests, particularly as the country will also be impacted by Brexit.
Funds from the combined €1.8 trillion MMF/NGEU package will help Ireland’s recovery and support its climate transition, research and development, and digital agendas, which are aligned with EU priorities.
The European Commission has already developed a major recovery plan for Europe to help repair the economic and social damage brought about by the coronavirus pandemic.
Specific supports for sectors important to Ireland, including agriculture, were implemented to secure food supplies and protect the income of farmers.
In addition, under the 2021-2027 MMF a special allocation of €300 million has been allocated for Ireland in recognition of structural challenges facing our agricultural sector.
Ireland will also be one of the main beneficiaries of a €5 billion EU Brexit Adjustment Reserve, created to counter consequences in Member States and sectors that are worst affected by the UK’s withdrawal from the EU.