Head of the Eurogroup "We Have to Recognize How Quickly Things Can Change"
DER SPIEGEL: Mr. Donohoe, during the European debt crisis several years ago, the Eurogroup put together bailout packages worth hundreds of billions of euros. Are we currently heading for a repeat?
Donohoe: I have great confidence in the euro area and in the euro. The frequency of economic shocks has accelerated in recent years. But the recovery from these shocks is stronger than is currently being acknowledged. Last year the question I faced everywhere was whether the euro area was going into recession. Now, we’re revising those forecasts upwards. I can’t be certain about what lies ahead. But I’m confident that we can navigate our way through a more volatile world.
DER SPIEGEL: It seems quite volatile indeed. In the U.S., Silicon Valley Bank has collapsed and a regional bank, First Republic, had to be propped up by other banks to the tune of almost $30 billion. Over the weekend, UBS took over Credit Suisse after a 50-billion-franc loan from the Swiss National Bank apparently wasn’t enough to calm the markets. Larry Fink of Blackrock is predicting that more "dominoes” might fall. Do you agree?
Donohoe: There are always risks when an economy is as deeply interconnected as the European one. But I believe that we are monitoring risks very closely and have regulated our banks much better to keep our banking system secure. Our European banks now hold far more liquidity and are much more regulated than a couple of years ago.
DER SPIEGEL: Still, we are seeing banks bailed out with public money, as in the case of Credit Suisse. What became of the promise made following the last financial crisis that banks would never again become too big to fail?
Donohoe on the situation of the banks
Donohoe: The key thing for me are banks in the euro area. And I am confident that we can manage any exposure we have to developments elsewhere in the world. We need to be humble and recognize how quickly things can change. But I believe that what we have in place will work and will make a difference this time around.
DER SPIEGEL: Nevertheless, the projects of forming banking union and unifying capital markets are far from complete.
Donohoe: Yes, but the banking union in particular is deeper and better than a decade ago. And I believe that developments over the last year will provide further momentum for the capital markets union. We have a duty to invest, especially to fight climate change. But the economic consequences of the war on Ukraine, the return of inflation and the increase in borrowing costs have made it harder to find money. That’s where a capital markets union can help.
DER SPIEGEL: The EU is currently discussing new fiscal rules. German Finance Minister Christian Lindner is unhappy with the European Commission’s plan to already apply new rules in 2024, even though they haven’t even been agreed on yet. Does the rest of the Eurogroup share that criticism?
Donohoe: There are different views, and Minister Lindner made his view very clear during the last Eurogroup meeting. Now we need to find an agreement. But what’s even more important in the short term: We have to change budgetary and fiscal policy in the aftermath of the COVID crisis.
DER SPIEGEL: You must be referring to programs like Italy’s "Superbonus 110%,” which was recently suspended. It promised up to 110 percent of renovation costs in tax credits. Have subsidies gone off the rails in recent years?
Donohoe: I make the general point that the economic policies that were put into place during COVID reflected the economic context of the time. That context has now changed, because both inflation and borrowing costs have gone up dramatically. Budget policy needs to reflect that. There is much common ground on this in the Eurogroup.
DER SPIEGEL: Is there? Countries like Germany and Italy certainly don’t seem to be on the same page.
Donohoe: There is enough agreement. But 2023 has to be the year where we turn that agreement into policy change. And there are signs of change: Italy, Spain and France have now phased out the very big tax reductions for energy that they put in place in 2022.
DER SPIEGEL: How about Germany? The German government has been heavily criticized for unilaterally announcing a 200-billion-euro package to combat the energy crisis.
Donohoe: Minister Lindner is one of the champions within the Eurogroup of sustainable public spending. Each government must decide what is the appropriate journey for them to change their energy support. And I know Minister Lindner and the German government will do the same.
DER SPIEGEL: In the past, there have been numerous violations of EU fiscal rules, but not a single country has ever actually been sanctioned. Will that ever change?
Donohoe: Yes. Credible sanctions will be an essential element of our future rules. But financial markets also evaluate whether they find national finance plans credible – and they respond if they don’t.
Donohoe on Ireland's approval of a minimum tax
DER SPIEGEL: Another reform on the way is the global minimum tax. Your home country of Ireland has profited from a statutory corporate tax of only 12.5 percent in the past, and you expect to lose around a fifth of your corporate tax revenue as a result of the reform. Why did you still agree to it?
Donohoe: Because the absence of an agreement would have generated very significant risks with regards to tax policy and trade. And it would not have fit our world view to stop a process that matters to citizens all over the world. Even though we will lose a lot of tax revenue, I believe it was the right thing to do.
DER SPIEGEL: What feedback are you receiving from companies?
Donohoe: They understand why we did it. Ultimately, they want to be based in a country that is part of a global policy framework, has a good reputation and is willing to be collaborative. And we are still going to have a very competitive tax rate.