The restrictive policies imposed in response to the last economic crisis were a mistake that prolonged the recession, the European Commission’s economic chief has told The Irish Times.
Paolo Gentiloni, a former Italian prime minister who has served as EU economy commissioner since 2019, spoke ahead of a trip to Dublin in which he will attempt to counter Irish opposition to a global deal on minimum corporate taxation rates.
“I think it was a mistake, the – you can call it austerity, of course,” Gentiloni said of the economic response to the financial crisis of 2007-2008 and its aftermath, the euro zone debt crisis.
“We acted very slowly. We declared mission accomplished too soon. And then the result was that we were dealing with this crisis for seven, eight years.”
The comments reflect a shift in approach that has seen the relaxation of EU fiscal and state aid rules, European Central Bank stimulus, and massive borrowing and spending in a bid to counteract the economic harm of Covid-19.
European Commission chief Ursula von der Leyen said last week the EU had "learned the lessons from the past" in its response. Some 19 EU economies are to recover to their prepandemic levels already this year, with the rest expected in 2022.
Mr Gentiloni said the challenge was now how to deal with a higher level of debt while avoiding a repeat of an approach that saw public investment reach “net zero” in the EU a decade ago.
“If we are serious about our programmes, the climate transition for example... we need a serious amount of public investment,” he said. “This will be, I think, needed both on the health care systems and for the green and digital transition.”
“We have an opportunity I think not only to have a rebound... but also to have more durable and sustainable growth, and maybe put an end to this ‘low for long’ era for the EU: low growth, low inflation, low everything.”
His remarks come as EU member states prepare to debate the bloc’s fiscal rules, which restricted annual deficits to below 3 per cent and debt to under 60 per cent of GDP until they were suspended last year.
Mediterranean countries are leading a push for the rules not to return in their prior form. But there is fierce opposition from more fiscally conservative countries that view them as essential for economic stability.
Minister for Finance Paschal Donohoe will be in a crucial position in refereeing this debate as president of the Eurogroup of finance ministers. Officials speculate that a compromise could involve retaining the limits, while exempting key investments from being included in the calculation.
A need to fund spending is the context to the global push to reach a new tax deal, including on how to determine which jurisdictions have a claim on the revenues of digital giants. Ireland is a holdout against a proposal to set a global minimum corporation tax rate of 15 per cent, above the Republic's flagship 12.5 per cent rate.
On his trip to Dublin, Mr Gentiloni will pitch that Ireland will still be able to compete even once such a deal is transposed into EU law, as planned.
“We will not put an end to tax competition. We will keep huge differences among European member states, and in the global arena. But the idea is to have a stable global framework, predictable and fair,” Mr Gentiloni said.
“This competitiveness… is not only connected to this difference in minimum taxation, that will in any case remain. It is also connected to achievements that the country reached in terms of skills, education, university, business environment,” he added. “It’s not based on two percentage points of this-or-that rate.”