Finance ministers must rein in spending on cost of living supports in response to the changing global economic picture, Paschal Donohoe has urged as he briefs European Union leaders in Brussels.
A phase-out of fuel excise cuts in Ireland is part of the policy shift, he continued, warning that too much supportive spending risks worsening inflation by driving up the price of services and food.
“Budgetary policy in the euro area … has to change,” Mr Donohoe told reporters as he arrived to brief the 27 national leaders at a European Council summit on the economic picture, alongside European Central Bank president Christine Lagarde.
“We are in a difficult moment, the consequences of the war and inflation could be with us for some time. And we need to ensure that measures that we have in place are affordable, but also sustainable.”
Asked what this meant for cost of living supports in Ireland, Mr Donohoe said it was important that the Government had already agreed a way to end fuel excise cuts.
As euro zone leaders gathered on Friday morning to discuss the economic picture, they were required to leave their phones outside the room to prevent leaks that might move financial markets
“If we’re in an environment in which the cost of energy has come down, and we think it has come down between now and the approaching winter, that the level of energy support has to change too,” he said.
There would be no additional energy credits offered this year, and the next budget in the autumn will decide what supports will be in place for next winter, he said.
The collapse of a series of banks in the United States and an emergency rescue of Credit Suisse has alarmed European leaders, who have been at pains to insist that the EU banking system is stronger than it was in the last global economic crisis of 2007-2008.
But as euro zone leaders gathered on Friday morning to discuss the economic picture, they were required to leave their phones outside the room to prevent leaks that might move financial markets, underscoring the seriousness with which the matter is viewed.
Mr Donohoe was called to brief them as President of the Eurogroup, and informed the leaders in a letter that while the euro zone had shown resilience in the face of the Covid-19 pandemic and invasion of Ukraine, “this is no time for complacency”.
He used the opportunity to call on member states to finish lagging reforms to remove barriers to allowing banks to operate across EU markets and to create pan-EU capital markets, saying a stronger, unified economy would make the euro zone more resilient.
Mr Donohoe warned that the nature of inflation was changing, and it was no longer high energy prices that were driving the problem. “We’re seeing some indications that the price of food, the price of services are also beginning to change,” he said.
There would still be some scope for cost of living supports “particularly for the most vulnerable”, he said. But inflation and the increasing cost of government borrowing due to rising interest rates means that spending will need to be curbed across this year and into 2024, he continued.
“At a time in which inflation is still high, and the cost of borrowing is going up, the decisions that finance ministers will have to take this year and next year will need to gradually change.”
