As a small open economy Ireland is largely dependent on international trade and markets, which makes it vulnerable to global financial crises.
However, being part of the European Union means Ireland can utilise the combined power of 27 Member States for fiscal stability and long-term economic growth, as well as recovery from unexpected financial shocks.
EU membership has helped Ireland transition from economic stagnation in the middle of the last century into a nation with a modern economy based on free trade, foreign investment and growth.
The EU’s Single Market environment, adoption of the euro currency and support from EU economic and fiscal policy coordination ensures Ireland’s economy remains stable and competitive.
Economic response to global crises
Russia’s invasion of Ukraine has posed new challenges for Europe’s economy. The EU and its international partners have condemned this unjust military aggression and imposed tough economic sanctions on Russia.
Ireland’s David O'Sullivan, a former Secretary-General of the European Commission, is the EU Sanctions Envoy. His role involves engaging in high-level discussions with third countries to avoid evasion or circumvention of the sanctions.
Russia’s attack on Ukraine began just as Europe was beginning to emerge from the Covid-19 pandemic and the outlook for the EU economy then was for a prolonged expansionary phase.
But the war resulted in upward pressures on commodity prices, supply disruptions and increasing uncertainty that led the European Commission to revise the EU’s growth outlook downwards, although GDP growth went on to beat expectations, remaining robust in the first half of 2022 and staying positive in the third quarter.
While the situation in Ukraine continued to evolve, the European Commission adopted a Temporary Crisis Framework to enable Member States use limited State Aid measures to mitigate the economic impact of the war by financially supporting severely impacted companies and sectors. State Aid is generally not allowed under EU rules as it gives companies that receive government support an unfair advantage over competitors.
In March 2023, the Commission adopted an expanded Temporary Crisis and Transition Framework to foster support measures in sectors key for the transition to a net-zero economy. This framework has allowed for a €100 million Irish State Aid scheme to support the microelectronics-manufacturing sector, which has been particularly affected by consequences of the war in Ukraine.
The European Union’s solidarity during the war and recovery from the financial consequences of the Covid-19 pandemic is of vital importance to Ireland, particularly as the country is also impacted by Brexit.
The EU responded to the coronavirus crisis with a recovery package of €1.8 trillion consisting of Europe's long-term Multiannual Financial Framework (MFF) budget and the temporary recovery instrument, Next Generation EU.
The package is designed to power an economic resurgence based on the Commission’s European Green Deal roadmap for a sustainable economy, and accelerate the digitalisation of Europe's economy.
The Recovery and Resilience Facility is the key instrument at the heart of Next Generation EU. To benefit from the support of the Facility, each Member State had to submit national plans to show how they would address country-specific challenges while supporting the EU green and digital transitions.
“The EU economy has weathered multiple shocks recently, from the pandemic to the impact of Russia’s war against Ukraine. It is now time to strengthen our focus on future growth and debt sustainability.”
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People.
Ireland will receive an estimated €989 million in Recovery and Resilience Facility grants, of which 42% will support climate investments and reforms and 32% will benefit the digital transition.
Ireland will also benefit from around €1.2 billion in Cohesion Policy allocations, and just over €8.3 billion in direct payments from the European Agricultural Guarantee Fund (EAGF). There is €2.25 billion available through the European Agricultural Fund for Rural Development (EAFRD) too.
Other sources of EU financial assistance available to Ireland related to the Covid-19 pandemic included:
- Almost €2.5 billion in financial support under the SURE instrument to assist with costs related to the Temporary COVID-19 Wage Subsidy Scheme;
- The Commission approved, under EU State Aid rules, a number of Irish schemes to support sectors such as tourism, arts and culture, air travel, beef production as well as not-for-profit entities and commercial bus operators.
- The InvestEU Programme provides Member States with long-term funding to companies and to support EU policies in recovery from economic and social crises.
The EU Budget
The EU’s long term budget usually covers a period of up to seven years and it is called the Multiannual Financial Framework (MFF). The budget is based on proposals from the European Commission that are negotiated and agreed by Member States at the European Council and the Council of the EU. It also has to be approved by MEPs at the European Parliament.
The MMF is used to implement EU policies and the 2021-2027 budget is worth €1,074 billion, although it is supplemented by the temporary €750 billion Next Generation EU recovery package to help repair economic and social damage caused by Covid-19.
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 four decades of EU Membership and it is now a net contributor.
However, the EU budget doesn’t aim to redistribute wealth, but rather it focuses on the needs of Europeans as a whole and Ireland’s access to the Single Market is estimated to be worth €30 billion euro annually, substantially more than its MMF contributions.
The framework for coordinating economic policies across the European Union is provided by the European Semester. This framework allows EU Member States to outline their economic and budget plans and have progress monitored at specific times throughout the year.
Member States have 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 Semester was introduced in 2010 in response to the global economic crisis of the time. It includes mechanisms to identify potential risks to stability and imbalances such as property market bubbles, like the one that contributed to Ireland’s economic crash in 2010.
In April 2023, the European Commission proposed new economic governance rules that will address shortcomings in the current framework that emerged in the aftermath of Covid-19.
The proposals seek to respond to significant post-pandemic higher levels of public debt, make EU economic governance processes simpler and place a greater emphasis on medium-term fiscal planning.
The cornerstone of the Commission's proposals are multi-year national fiscal-structural plans in which Member States will set out their economic targets and reform measures over a period of at least four years.
The annual Semester cycle currently runs from November to October, beginning with the Autumn Package in which the Commission sets out general social and economic priorities for the EU and provides Member States with policy guidance for the following year.
The Commission's 2023 European Semester Autumn Package priorities are based on the Annual Sustainable Growth Survey, which outlines EU economic and employment policy for the coming 12-18 months.
The latest priorities are focused on mitigating the negative impacts of energy shocks caused by the invasion of Ukraine in the short term, while continuing to foster sustainable and inclusive growth in the medium term to tackle inflation and support the green and digital transitions.
According to the Commission’s Spring 2023 Economic Forecast, Ireland's GDP is projected to remain on a solid growth path of 5.5% in 2023 and 5.0% in 2024 following double digit growth in 2022. Net exports are the main driver of economic activity, which is also supported by resilient private consumption. Inflation is estimated to have peaked at 8.1% in 2022 and is set to moderate gradually throughout 2023 to reach 2.6% in 2024. The budget surplus is projected to increase further in 2023 and 2024.
Ireland’s unemployment rate was at near record lows of 4.3% at the beginning of 2023 with a vacancy rate above historical averages, indicating marked difficulties to fill vacant positions. As the Irish economy is estimated to be operating at full employment, real wages are projected to increase significantly.
However, the forecast report warned that recent record performances of the export-intensive pharmaceutical and information and communication sectors, which followed the uplift during the pandemic, are unlikely to be sustained.
Overall, the Commission is of the opinion that the 2023 Draft Budgetary Plan for Ireland is in line with fiscal guidance contained in European Council recommendations.
The Commission’s opinions on Ireland’s draft plan included:
- That Ireland should stand ready to adjust current spending to the evolving situation in Ukraine
- Ireland was also recommended to expand public investment for the green and digital transitions, and for energy security, taking into account the REPowerEU initiative to reduce dependence on fossil fuels. In this regard, the Commission advised Ireland to make use of the Recovery and Resilience Facility and other EU funds.
- For the period beyond 2023, the Commission says Ireland should pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions.
An in-depth review (IDR) of Ireland was carried out after macroeconomic imbalances were found in 2021. These reviews are carried out by the European Commission to help Member States correct imbalances and the 2022 IDR for Ireland found no imbalances.
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 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 those that have adopted the euro, including Ireland, 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 Public Expenditure, National Development Plan Delivery, and Reform, Paschal Donohoe, is its President.
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, within 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.
The Banking Union, established in response to the global financial crisis in 2008, strengthens Economic and Monetary Union. It creates a transparent, unified, safer market for banks and helps protect depositors by ensuring banks behave prudentially and that action is taken quickly to prevent them from failing.
This has helped the EU's banking sector become more resilient, with financial institutions in the EU now well capitalised, highly liquid and closely supervised.
In April 2023, the Commission adopted a proposal to strengthen the existing EU bank crisis management and deposit insurance (CMDI) framework to further protect taxpayers and depositors from failing medium-sized and smaller banks.
The Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is responsible for completing the banking union, as well as the Commission's policies on banking and finance.
Led by Irish Commissioner Mairead McGuinness, its objectives include building a well-regulated, globally competitive single market for financial services and developing sustainable financing strategies to support the implementation of the European Green Deal. 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.
Webpage of Mairead McGuinness - EU Commissioner for Financial services, financial stability and Capital Markets Union
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