Mairead Farrell (Galway West, Sinn Fein)
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I welcome members and viewers who may be watching our proceedings on Oireachtas TV to the second part of this session of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. We will now discuss the European Commission’s review of the EU governance framework. I welcome to the meeting the economist, Dr. Dirk Ehnts. The format of the meeting is that Dr. Ehnts will make some brief opening remarks, which will be followed by a question-and-answer session with members.

I will read the note on privilege. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses are again reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if a witness’s statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction. Witnesses attending remotely, from outside the parliamentary campus, have been made aware that full privilege may not apply to them. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such as way as to make him, her or it identifiable. I remind members who are attending remotely of the constitutional requirements that members must be physically present within the confines of the place which Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings.

I now invite Dr. Ehnts to make his opening remarks.

Dr. Dirk Ehnts:

I thank the committee for the invitation and I hope that I can be heard.

In a communication from 19 October 2021, the Commission relaunched the public debate on the review of the EU economic governance framework, taking stock of the changed circumstances following the Covid-19 crisis. Eleven key issues for the public debate are identified, all posed as questions.

The first questions reads, "How can the framework be improved to ensure sustainable public finances in all Member States and to help eliminate existing macroeconomic imbalances and avoid new ones arising?" From an economic point of view, this is an interesting question. There is no definition of sustainable public finances. I would argue that there cannot be one. A central bank is the monopoly supplier of money and it executes a government’s payments by creating money. The President of the European Central Bank, ECB, Christine Lagarde, confirmed last year that neither the ECB nor the national central banks, or the Eurosystem, can run out of euro. Therefore, as long as the Eurosystem is buying up sufficient government bonds within the pandemic emergency purchase programme, PEPP, eurozone governments like those in Ireland, Italy or Greece will not and cannot run out of money. Since deficit limits are off as well - the Stability and Growth Pact, SGP, was deactivated in the spring of 2020 - there is no punishment for overspending, however overspending would be defined. Therefore, there is no limit to the amount of euro a government in the eurozone can spend today. This seems to be working rather well.

In June 2021, the Commissioner for the Economy, Paolo Gentiloni, stated “Strong common fiscal rules should take into account two problems: First, the reality of our different fiscal situation in public finance [meaning the eurozone countries] and second, the need that we have to support growth and sustainable growth”. There is broad consensus that the framework does not work. Why would it be so bad when the old rules return? Ireland would return to drafting a budget with a fiscal deficit in mind, instead of addressing the environmental crisis, social deficits and other ills. The Irish unemployment rate as of October 2021 was 5.2%. This means that there are plenty of workers available who could be employed to increase, for example, green public investment. On returning to the old rules, that could not happen.

Olivier Blanchard, the former International Money Fund, IMF, chief economist, called for fiscal standards to replace fiscal rules that are one-size-fits-all. It would be a step forward to revise the economic governance framework in order that the public deficit and debt limits are replaced by employment and European Green Deal mission targets. If that does not find a majority, then green investment should perhaps be exempted from calculations of public deficit and public debt. Upcoming changes in the global tax code might reduce Irish GDP and hence increase the public deficit and public debt-to-GDP ratios. It makes no sense to cut Government spending in Ireland, just because some multinational companies switched their headquarters. The framework should be more flexible to deal with issues like this.

The economic governance framework should reflect, then, that government spending is essential to generate employment and address society’s ills. The wage growth of public workers is a key determinant of the rate of inflation. The existing rules have been too tight. The ECB did not hit its inflation target in the past decade because wage growth and government spending were too low. Also, the eurozone’s unemployment rate never fell below 7%. That figure is too high. The rules need to be more expansionary and mission-oriented. They also need to be tailored to the specific conditions in which the eurozone countries find themselves.

Mairead Farrell (Galway West, Sinn Fein)
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I thank Dr. Ehnts. I will begin with my own questions initially. I wonder about the origin of the fiscal rules and how they came about. There is the 3% debt-to-GDP rule and the 60% public debt level rule. I wonder if those figures are supported by any evidence. If not, why were those particular figures chosen? What are their implications for economic stability and development?

Dr. Dirk Ehnts:

I thank the Acting Chairman for that question. The 3% rule for public deficit-to-GDP rule was invented by a low-ranking employee at the French Treasury in 1981. His name is Guy Abeille. He had the task of finding a deficit-to-GDP rule. He saw that the French Government at the time had a deficit-to-GDP ratio of roughly 2.6%. He thought that 1% would not be enough, 2% would also not be enough yet, but maybe 3% would be a good ratio, because it would give the French Government some fiscal space. That is how they picked the rule. There is no scientific evidence that would back up this claim that this figure is some kind of equilibrium rule or socially optimal rule. There was no scientific discussion in the 1980s about what kind of specific numbers to choose.

There is also the public debt-to-GDP ratio, which is 60%. It is the same in this case. There was no decision or debate. The figure was more or less picked because it was a number that was roughly the average of the eurozone’s public debt-to-GDP ratios. That is how they came up with these rules. The odd thing is that one would normally expect that if a deficit is always to be 3% or less, public debts should rise. It is not clear how it is possible to fit this 3% deficit rule together with the 60% public debt rule. If a country runs constant deficits, of course its public debt will rise. The two numbers are therefore inconsistent. There has been no evidence that countries with fiscal frameworks like this would somehow grow faster, have less unemployment, or hit any other mission targets better than countries that do not have these kinds of rules. That came out of, I would say, the ideology of the 1980s and 1990s, that the markets would somehow fix things and that the governments should not play too strong a role in the economy.

Mairead Farrell (Galway West, Sinn Fein)
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That is quite interesting about how that figure of 3% came about. Dr. Ehnts mentioned climate in his opening statement. I am worried about the chance of implementing a Green New Deal, GND, given the current rules. I am also sceptical that it would be enough to increase the debt ceiling to 100%. The majority of financing for the Green New Deal will have to be done at a national level. Does Dr. Ehnts think that the current rules, or even an increased debt ceiling, would make reaching our 2030 climate emission targets possible?

Does he think an exemption for public and green public investment would help achieve this?

Dr. Dirk Ehnts:

Under the current rules, it would not work. If we changed from 60% to 90% or even to 100%, it would not work. We have countries like Greece. The Greek Government's debt is roughly 205% of GDP. They also need public investment connected to the green deal. That means we have to rethink the rules completely. Many countries now have debt of more than 100% of GDP. It is not possible to go back to those old rules because we did not hit those targets anyway. It we have to choose either to hit fiscal deficit targets or have the green investment we want - and the European Green Deal is a European Commission policy - we should opt for the real-world result rather than an abstract target invented by some low-ranking French bureaucrat. I have nothing against low-ranking French bureaucrats but that number is clearly dysfunctional.

Mairead Farrell (Galway West, Sinn Fein)
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Often in the conversation around money creation, I worry that there is a lack of understanding of the process of money creation. Does Dr. Ehnts think that is the case and that, if there was a deeper understanding of how monetary operations work, there could be a different view of fiscal rules?

Dr. Dirk Ehnts:

I believe the Acting Chairman is right. We should imagine the monetary system as one run by a government to provide itself with the resources it needs to do its job. That is why we have modern monetary systems and why we charge our citizens with tax liabilities, so they offer goods, services and work to the government. In the end, the euro is a tax credit we use to get rid of our tax liabilities. If you want to redefine public debt, you could say it is the money a government has spent and has not yet received back in the form of taxes. The government cannot go bankrupt. We have clearly seen this in the last two years when the ECB steps in and buys up government bonds. Technically, the ECB buying government bonds is creating a green light at the national central banks for governments selling those bonds. As long as the ECB does this, there cannot be a repeat of the Greek situation when that country ran out of money in the early 2010s because the ECB did not get behind it.

The monetary system in a democracy, and we are democracies in the European Union, should support democracy. If a budget is drafted with a majority in a national parliament, then the money that needs to be spent should be made available by a national central bank. If there is further co-ordination, we can talk about it but it is unacceptable to have an unemployment rate of 7% or more for more or less 20 years in the eurozone. People want to work and we can easily create or find jobs for these people because they are productive.

Mairead Farrell (Galway West, Sinn Fein)
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My last question follows on from that. The fiscal rules set targets around debt and deficit levels but not around employment levels or emission targets. Would these be better metrics to strive for?

Dr. Dirk Ehnts:

Yes. We normally have a central bank that has an inflation target but also an employment or growth target, like the Federal Reserve. All the other countries have central banks which support the national government. They make sure the national government never runs out of money, even if tax revenues plummet because of a pandemic, for example. No country with its own currency went bankrupt or ran out of money in the current crisis. Even as the eurozone, we understood this and I think the ECB has done a great job with the PEPP programme. It is up to us now to say we can make the money available, so let us target the missions. Let us have the governments pick some missions they want to fulfil. Employment targets, for example, would be a great idea. After years of austerity, policymakers still have the idea that budgets should be drafted with a certain deficit target that must be hit. They think about public purpose and things to do for the people but it would be better to switch focus and directly address the problems we have today, such as the climate crisis and unemployment. That would be much better than trying to hit those deficit targets.

Alice-Mary Higgins (Independent)
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I thank Dr. Ehnts for his presentation. I will pick up where he left off on what he describes as missions. That is about what gets measured in the fiscal process. I gained experience of tracking the EU semester process when I was a civil society advocate and part of the Better Europe Alliance of civil society groups. What we measure is important. I had questions around fiscal rules. Dr. Ehnts has answered those clearly but there was a concern during the previous semester process, which was the annual instrument to measure the application of the fiscal rules and to send country-specific recommendations. What we found was that not just national missions but agreed collective missions of Europe such as the Europe 2020 strategy for smart, sustainable and inclusive growth - which was what Europe was meant to have as its mission for the last decade - kind of got put aside for short-term fiscal targets. We lost a decade when Europe could have invested in the transformations needed on climate change. We have done some good things in digital governance but we lost a lot of time in investment in the digital area. We have had inequalities within and between countries. These are recognised by the European Commission as current financial problems for Europe. With regard to many of them, their hands were tied in addressing them. It is about what we measure and the timeframes.

I have two questions. The first concerns what we measure. Dr. Ehnts has mentioned employment targets. The sustainable development goals and indicators from them form a qualitative measurement. Will he comment on that? That is important in terms of environmental and social targets and how we measure them qualitatively.

Dr. Ehnts mentioned Mr. Blanchard. While his proposition of fiscal standards as a replacement for fiscal rules contains something positive, they are still economic formulae. I credit the Acting Chairman for the phrasing because she has said that a rule might be "Don't drive above 60 km" and a standard is "Don't drive at excessive speed". A standard is an improvement but it is still a custom macroeconomic formula, whereas many indicators we need might be things like the sustainable development goals and climate goals. I will let Dr. Ehnts answer that and come back in with a question on timeframes.

Dr. Dirk Ehnts:

On how to measure those targets, that is a task I would give to people who are experts in their fields. We have a wide range of targets and should agree on what the targets are. We can pick some realistic targets, hopefully, and try to aim at them. It is difficult because we cannot project how much money we need to hit those targets. It will be interesting to see what eurozone nations will do and what is cost-efficient and resource-efficient in terms of reaching those goals and addressing those problems. Sometimes it is not about the money but about looking for the right mechanism to reach a target. We tend to discuss the money but do not address the resources. If Germany, for example, were to have full employment and we tried to hire workers to hit some kind of target, it would be difficult. However, if another country still had unemployed workers, it would be easy for that country to hire those people.

We should focus more on the energy we have, the raw materials, the resources and the workers, and not so much on terms such as GDP and euro. As I said, I would leave that definition of targets to another economist or specialist in the field.

On the fiscal standards, I think the Senator is correct. Blanchard’s proposal is a compromise; with regard to fiscal standards, the rules are not completely thrown out the window. It is very complicated in the eurozone because some people are afraid of eurozone governments spending too much money, and if the rules are as they are today, there is no limit. Government spending could just be increased, and it would be possible for any country to buy some kind of firm from another country and move the production to a domestic location. The euro is an experiment and it is difficult. It is quite clear that countries should not be able to spend whatever they want but it is also clear the rules have been too tight, given there was an above-average rate of unemployment for the past 20 years. There was an above-average rate before, during and after the global financial crisis, so there is a problem.

The macroeconomic mindset that applies to policymakers suggests they still believe in and think in austerity, so it is more important to be expansionary and to deal with the problem of governments overspending when it arises. There is no problem of governments overspending at a national level. That has not been a problem for the past 20 years and I do not expect it will be a problem for a further ten at least. Why should we use this kind of fiscal framework to address a problem we do not have? Of course, one could argue we do not have this problem because we have these fiscal standards, but other countries such as Canada do not have these fiscal standards and they are doing fine.

Alice-Mary Higgins (Independent)
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When we talk about what is measured and resources, it strikes me that, while there is infinite inflexibility in regard to how we approach the monetary aspect, there is a hard resource limit in regard to the planetary boundary limit. There is a shadow cost to carbon, that is, not in the economic sense. Sometimes I wonder whether we try to fit carbon into the economic model rather than recognising that the economic model needs to operate within a hard and non-negotiable limit in terms of carbon. The question of which fits inside the other really matters. Perhaps Dr. Ehnts will comment on the importance of that in the context of our new fiscal rules such that they will understand themselves within that constraint, rather than having it as a kind of an add-on factor that can adapt itself to the fiscal aspects.

Dr. Ehnts mentioned that we have not had the issue of overspending for some time. Will he comment on the idea of the annual framework? There was almost a move back to having a quarterly report and a market-mood response. If that same kind of a timeframe is brought in to any new fiscal rules or economic governance framework, how could it curtail us in taking five-year or ten-year investment actions, where the rewards and the necessary changes are going to come in five or ten years? There is much focus on the suspension of the fiscal rules to allow investment to bridge the crisis, and there may be some arguments, which Dr. Ehnts might comment on, for that needing to be extended for a period. Nevertheless, there is also a strong argument that after the protection role, there is the transformation role. A crisis is not always a matter of responding and keeping what you have in a holding pattern but rather about responding and making heavy investment to make a big change, as may be required on climate.

Dr. Dirk Ehnts:

I think the Senator is correct. The way we are addressing the climate emergency right now is that we are muddling through and experiencing crisis. Of course, the argument can be made that the Covid-19 pandemic was man-made, in a way. Scientists have for years been warning in books about this kind of virus emerging at some point in the future, given that land use has increased throughout the planet. If we use land that has never been touched, who knows what kinds of sicknesses and viruses exist that could affect us? That there are billions of us living on this planet means these viruses can be deadly.

We are looking at very large timeframes here. If we want to change the way we interact with nature, recognising we are part of nature and that we cannot overstep the planetary boundaries without threatening our survival on this planet, of course we will need to address it on a longer timeframe. A quarterly report to update on progress will not be enough and, in fact, it will be counterproductive. I agree we need plans that are much longer and a time horizon of perhaps ten years, like the Europe 2020 strategy, for example. That is the way to address those matters. Forcing countries to hit fiscal targets every year, with the policy targets and emission goals becoming a secondary target, is definitely not helpful.

The European Union has to make up its mind. Do we want the European Green Deal, whereby governments are involved more heavily, or should we stay with the old ideology of public finance sustainability and public debt sustainability first? No such definition exists. In a way, you could argue public debt should be zero because in that sense, we could not run out of money. Perhaps in the next crisis, there will again be falling tax revenues, so maybe government debt should be negative.

All these matters are not very scientific. We should try to use the rules to make our world, the European Union and its nations a better place.

Alice-Mary Higgins (Independent)
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My final question for now relates to how we spend, which is an ideological point. I refer to the European Commission's policy discussion document on the fiscal rules, which was published in October. Dr. Ehnts questioned what the fiscal rules are based on. There are certain assumptions regarding the role of public investment or lack thereof. The Commission indicates public investment should not be made unless there is market failure, which is a very high bar to prove. Both private and public investment may have a role. From an economic perspective, however, are there times when public investment to bring about major changes, such as with the European Green Deal and on climate, can be more economically, socially and perhaps environmentally efficient, as well as more sustainable through long-term control in being able to continue to adapt as required to an evolving issue such as climate?

Public investment is constrained. There has been an obsession with things being done off balance sheet and there has been a dynamic whereby the state's role is to create an enabling environment for private investment. It strikes me, however, that there is a risk in leaving crucial building blocks of society to the private market, such as housing, where there is an inflationary trend that is completely out of kilter with inflation in wages, because we are building in a speculative vulnerability. Will Dr. Ehnts comment on that? Is this a period for front-loading public investment, which would in turn support more economic opportunity down the line?

Dr. Dirk Ehnts:

I agree with the Senator's broad points.

The question is do we want to have a larger state or a smaller state. It is depends on what our targets or aims are. If we have to create new infrastructure, because we understand we cannot move forward with the infrastructure that we have in place and we must green our infrastructure, for example, it would be a difficult decision for private investors as to whether to invest in that. They would either have profits or not have profits in 20 or 30 years because we are talking about infrastructure that would be built and would last half a century or even a century. Often much uncertainty surrounds that. The private sector normally would not want to invest in those things and it would try to get the public sector into that area to guarantee it profits but that is inefficient. That is just a waste of resources. There is a clear case for some parts of public infrastructure to be run by the public sector. If it is possible to run it with private firms, that would also be okay. I have a sense that we are now living in a post-ideology world where we would say let the private sector and public sector compete and then we will find out what works. If, for example, public trains work better than private trains, then so be it. As almost all of us have public universities, for example, there are some areas where there is strong consensus that it is okay to have the public sector in there but I would also say the public sector has to find a new role. It has to be leading, not just creating a level playing field. It needs to be more dynamic and creative. We need to rethink the role of the state in our societies and the role government. In recent decades the government was more or less trying to find rules for the market to work within those rules. However, as the Senator said, with real estate, for example, the results are pretty bad. Markets are there to maximise profits. In markets those people who have euro can get what they want but those who do not have euro do not get what they want. If the Senator recognises, for example, that real restate that is built in this country is built for those people who have a lot of money, then there is a need for the Government to be back in that market. I would argue it is even clear now to people in Germany that this must be the case. It is not about building some type of social housing, now there is a need to build for 99% of the population. We have to rebuild our cities with new infrastructure and that must happen not at a centralised government level but, hopefully, at a decentralised level where citizens can participate and decide what kind of infrastructure they would like to choose. It would be great if the rules could be changed in a way that we would have more decentralised decisions about public infrastructure. That would be a step forward.

Bernard Durkan (Kildare North, Fine Gael)
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I welcome Dr. Ehnts. I listened to his comments and I have a few questions. When the economic crash came we were all dumbstruck and we got a great deal of advice, some of it conflicting, from many quarters as to what should be done. Even though the advice was conflicting, on the one hand, there was an easy option and on the other hand, there was a different option, but, unfortunately, there was only one option as far this country was concerned. We had to go the hard route because we did not have the required credibility or credit rating and we were overborrowed. We had an overhanging cantilever debt and, as result of that, we had to cut our cloth according the measure. What would Dr. Ehnts have advised at that time and in the event of a similar situation arising again? People would tell me that is hypothesizing but a little hypothesis is no harm now and again in order that we would know where we should go, what we should do and how we should do it.

Dr. Dirk Ehnts:

I thank the Deputy for his question. It is a very difficult one to answer because you only walk into a river once and when you walk in again it has changed. When we look back at the economic crisis, the euro crisis, the problem was that the ECB was not providing support. In a way the political problem was that the ECB was not open to pressure because it was an independent body. If it was part of the European Union back then. it had very little contact with other bodies of the European Union. It would have been politically very difficult to get the ECB to create asset purchase programmes. I would argue right now that if we could go back in time, I would try to persuade people that the ECB can and should back up the national governments and make sure their liquidity and solvency is guaranteed by purchasing as many government bonds as necessary. Perhaps it is not necessary to purchase them at all because just announcing that kind of programme works. That type of solidarity mechanism would not cost a single euro. If we were to have an eurozone crisis, another financial crisis in the eurozone, I think it would be would be handled in a different way. The last time it was a complete disaster, even from the German perspective. Ireland was forced to nationalise its banks and that was a bad call, a bad decision. I know the letter the ECB wrote to the Irish Government and the social hardship it created, but that is the past. There is no talk about austerity right now. With the Covid crisis, everything was okay. They completely changed the rule book. The deficit targets were cut out. The Stability and Growth Pact was deactivated. The ECB created the very big purchase programme. The European Commission seems to have learned this kind of policy response is very harmful. That is my perspective. As a German, I feel very sorry about the role of German politicians back then, but I am halfway optimistic that this will not happen again.

Bernard Durkan (Kildare North, Fine Gael)
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Does Dr. Ehnts view inflation as a possible enemy of stability in the future given its various levels across the European Union at present?

Dr. Dirk Ehnts:

I would argue that right now it is not that we have inflation which is above the target. The core inflation rate of the eurozone is 2%, which is exactly the target rate. Energy prices have been rising, although in the past few weeks they have been falling. The rebound by the energy prices created deflation last year and now it is creating above-average inflation. If the oil price stops rising right now and the price per barrel of oil is somewhere between $80 and $90 and if it is stable there for the next year, the problem of inflation, if you see it as a problem, will be gone. Then we will be back to the old problem that we do not have enough inflation, that the ECB cannot hit its inflation target. We should have a conversation in the eurozone about public wages. If public wages are rising by less then 2% in most eurozone countries, how is it possible to have prices rising by more than 2% or 2% even? It seems to be impossible. We cannot have wages growing at 1% and then expect prices to grow at 2%. That kind of political system is unsustainable. Workers would lose and voters would be upset with a system like that. If the ECB wants to hit its inflation target we need to have higher rates of wage growth.

Bernard Durkan (Kildare North, Fine Gael)
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Given that we in this country have an inflation rate above what we expected, the sustainability of that inflation needs to be carefully watched. I was one of the people who put down numerous questions on inflation and the potential destabilising effect it could have on the economy before the financial crash. All the information I got back that was to the effect that everything was fine and there was no problem. Only one question in Parliament in that period resulted in a factual response which raised the red flag to the effect that this was a serious situation. The late J. K. Galbraith used to say that in the event of governments having to reflate the economy or introduce measures to support the economy, there was a need for measures to calm it down, namely, price controls and structures to calm it down.

How does Dr. Ehnts feel about that?

Dr. Dirk Ehnts:

I would argue that probably it is possible to improve the situation in the energy sector. The European Union has probably done things wrong. It is not a good idea to have a spot market to buy energy because the people who need energy are forced to buy it at any price. Of course if one has a monopoly or cartel situation then one should react by creating a monopsony. One should act as a European Union and say that there is only one buyer with which to negotiate so if one wants to sell gas or oil to the European Union countries then one can only sell it through some kind of European Union institution that we can set up. Then one would have a lot of market power because one is the only source of demand for oil or gas. To have a strategy where one lets the small countries in the eurozone negotiate or buy directly from the market on an almost daily basis for energy is not a good idea.

Mairead Farrell (Galway West, Sinn Fein)
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A Senator had indicated a wish to speak but now appears to have left. Senator Higgins can ask her additional questions and I will intervene if the other Senator returns.

Alice-Mary Higgins (Independent)
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I am happy to yield to Senator Sherlock because I know that she has looked into the area of public investment as well.

On a practical level, I would like to hear Dr. Ehnts outline the timeline for a review of economic governance. There are very practical questions. I think that Dr. Ehnts and over 99 institutions, academics, NGOs and others have signed a letter that says, for example, that the period for considering what comes next needs to move beyond spring 2022. We know that the European Central Bank has been purchasing assets but was considering winding down its purchase of state bonds or assets, or reducing that, next spring. I ask Dr. Ehnts to inform us, as a committee, in terms of our intervention into this process. What is Dr. Ehnts's sense of where the debate is at now in terms of what will unfold during 2022? Is it an extension from 2023 to 2024 of the current suspension of the fiscal rules and the Stability and Growth Pact to allow for better debate on what comes next? Should the European Central Bank continue to purchase of assets? I ask Dr. Ehnts to comment on the timeline issues and practical issues.

Dr. Dirk Ehnts:

I believe the political situation has already changed a bit. Even before the pandemic hit, roughly one third of the countries had debt levels of more than 100% of GDP. In 2019, ten countries in the European Union broke the rules of the Stability and Growth Pact, which is more than a third of the countries. Only Romania was punished in 2019 so nine countries were not punished. It seems like the European Commission politically understands that one cannot enforce the rules. The rules do not even make sense in good times. 2019 was a good year overall for the eurozone economies but even then a third of the countries broke the rules and these are fair-weather rules. In the crisis the first thing that we did was get rid of the rules. Consequently, I think that the political negotiations will be about the deficits that countries will be allowed to run. In a way, it is a strange game because the deficit is not under one's control. One can control government spending, more or less, but if there is a financial crisis then tax revenue goes down and that is not one's fault as a government.

Choosing deficits is a bit awkward and one thing that could be a step forward would be to say let us negotiate government spending directly, which is the discretionary part. To some extent we are already seeing a kind of political line-up. There are the frugal four counties that are a little bit crazy and say they want the old rules back but other countries such as Italy and Spain - Italy and France are now working together - say that countries need to talk. One should talk about government spending and discuss how much is affordable but then somehow negotiate within the eurozone. If that cannot be done then countries can negotiate public deficits that must be hit. These kinds of discussions have already taken place. In 2014, the governments of Spain and Portugal broke the fiscal rules and were not punished, which was the start of it. Somehow there must have been negotiations, which I guess took place behind closed doors, where the European Commission say that if the budget deficit is not larger than a certain amount a government would not be punished. I think that is the political game now.

Alice-Mary Higgins (Independent)
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I guess that the precautionary conditional credit line is a revised version that has been proposed in the European Stability Mechanism legislation in Ireland. Lots of countries just would not qualify for a precautionary conditional credit line. It is almost a safety net that would not work in that regard.

I ask Dr. Ehnts to comment on the ECB's asset purchase programme. Also, I ask him to comment on the idea of certain kinds of exempted expenditure. I know this is one of the debating points. I mean certain categories of public expenditure should be exempted from fiscal standards and rules or deficit and expenditure rules.

Dr. Dirk Ehnts:

I will first discuss the asset purchase programme. The ECB is independent so it can just decide to create a new programme, which has a different name and is maybe more permanent. I would say that the ECB has understood that it must continue with this indefinitely. Mario Draghi started that and his predecessor, Jean-Claude Trichet, was against it. Many of these hard money Germans left the ECB because they were frustrated. Jens Weidmann was the last one and over the past decade, three or four Germans have left.

It seems that the majority opinion inside the ECB is that the ECB will have to take care of the public finances of national governments. It is clear that the concept of debt sustainability does not apply to a nation state, so the ECB will take over this kind of responsibility even though it is not explicit in the treaties. As the European Commission cannot force the ECB to not do that then I think we are kind of safe on that side.

In terms of excluding some parts of Government spending from the public debt-to-GDP or deficit-to-GDP ratios, these kinds of discussions are going on. As an in-between, maybe they are useful. It is probably possible to do this but I am not sure. The incoming German Government also seems to be trying to get around the rules and spend lots of money next year because it still can. Maybe it can just spend some of that money also in the next couple of years but invest it in the meantime somehow. Everybody is trying to bend the rules and muddle through. That is part of the process, I guess, but it is unclear at what point we will accept that we need to change the rules more drastically.

Mairead Farrell (Galway West, Sinn Fein)
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Do many other countries have fiscal rules? I am interested in hearing the global view of the rules. I am aware that the New Zealand Government still has the old fiscal rules in place but, interestingly, the Green Party there is quite against them.

Dr. Dirk Ehnts:

On a global level, the biggest economic blocs are the US and probably then China next to the European Union. As far as I know, China has no such fiscal rules, which I guess is obvious because it is a Government-run development policy that they execute. The US has some strange fiscal rules as well but not deficit limits. I remember that Barack Obama, in 2010, watched over a public deficit-to-GDP ratio of 12%.

That would be outlandish here in the eurozone. He said, "No, that's okay, we're going to grow ourselves back to get it back to 3%", and that is what happened. The US also has the public debt ceiling. There has not been a lot of debate on that in the past, say, 20 years as they just raised the debt ceiling every time. When you hit the debt ceiling, you have to a have a majority in both Houses to raise it, otherwise you cannot spend more. They had this problem a couple of weeks ago in the US and the decision was taken to postpone the matter until December. I have not heard back on it. Normally, Wall Street uses all of its influence to make sure that there is no default on Government bonds, US Treasuries, so that should not be a problem. They have a pay-go system whereby when there is an increase in Government spending, an explanation is required as to how it is proposed to either raise taxation in the future or to cut Government spending elsewhere in the future or in the present to make sure that it is deficit neutral. They have different types of fiscal rules but mostly they are harmful because they cause Government spending to be lower than it would otherwise be.

On the international level, Canada, for example, does not have any of those rules. The Prime Minister, Mr. Trudeau, was elected about ten years ago. He campaigned on the promise of not enforcing austerity, whereas social democrats and conservatives in Canada were doing that. It gives more choice to have no fiscal framework. People like to think that the Government can help them solve some of society's problems. Government spending going up means that the private sector might be producing more but it does not mean that there are more public employees. It gives you more options. That is a good thing. As I said, the other countries more or less ignore these type of fiscal issues that we create. There are other things that are worse. For example, in Sweden the Government is supposed to have a fiscal surplus of 1% of GDP each year in normal times. That is much worse than in the eurozone. They have their currency such that they cannot run out of their own money so why would they do this? To some extent, I find it undemocratic to write up in your constitution that there is a limit to Government spending. Why would you want to do that? Do you not trust your democracy? Do you not trust your voters to make the right decision to vote for the right parties? I apologise if I carried on a little.

Mairead Farrell (Galway West, Sinn Fein)
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I note Senator Higgins has indicated. I will allow her in but I ask members to be mindful that we have to conclude at 4.30 p.m.

Alice-Mary Higgins (Independent)
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I was moved to comment by the point about democracy. That was a crucial issue in terms of austerity and the democratic crisis that we have seen across Europe in terms of disengagement and disenfranchisement. How important is it that citizens see that they can influence economic policy and that if they vote for something that is of importance to them, as described by Dr. Ehnts, that something will be reflected and carried through? That sense of economic decision-making is not just a nice thing, it is an important thing. I have a concern in regard to the following. While I welcome an economic governance review, I also am one of the four Irish parliamentarians on the Future of Europe process. We have this process whereby, not just at a national level but at an EU level, we are asking all of our European citizens to engage on their ideas about what they want for the future and the priorities in that regard for them. How important is it that we do not end up with a lot of strong recommendations from the European citizens and then an economic frame that has been decided in parallel and separately such that their ideas perhaps will come up against? How important is it that the new economic governance frame serves the new agreed priorities that emerge from something like the Future of Europe process, as well as, as referenced by Dr. Ehnts, the EU?

Dr. Dirk Ehnts:

I believe that is very important. The European Union wants always to make sure that policy is decided at the lowest possible level, which is that concept of subsidiarity. It is important that economic decisions are influenced by its citizens. That is why I would argue the European Green Deal could be much more regional and local. Currently, it is very much centralised in Brussels. It could be something which improves European democracy. It is giving a voice to citizens and lets the people decide on what type of solutions we should spend our money. For example, it would be a nice idea to have the European Commission agree under the European Green Deal to give money to local communities but allowed them to decide what to do with that money and told them only what is expected of them. For example, it the issue was fixing local transportation, the discussion would be about electric buses, additional bicycles etc. All of that would be a matter for the communities. There is no one-size-fits-all solution. This can be about playing on the strengths of Europe. We all come from different cultural backgrounds, with different histories, so we will find different solutions. It is not necessary to have only one solution for the whole of Europe, but it would be nice if all of the regions would bring in their own advantages and peculiarities so that the solution is basically fitted to the citizens that are in the end the consumers of those public infrastructure. Again, it would be nice to give a voice to people in order that they can see that voting and making decisions on various issues makes a difference in their lives. That is very important for democracy.

Mairead Farrell (Galway West, Sinn Fein)
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I had a final question, but I note Deputy Durkan is indicating so I will allow him. I remind everyone that we need to conclude in the next two and a half minutes.

Bernard Durkan (Kildare North, Fine Gael)
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I acknowledge that one size may not fit all but there needs to be an interlinking and flexible system within which all in the European Union can work. Otherwise, we will have a situation whereby every country, depending on its strength or weakness, will be going off in a different direction, in which case the European Union will be no more.

Dr. Dirk Ehnts:

I agree. For example, when it comes to trains, we should have a European rail network with high-speed rail. It has to be compatible. We have to make sure that the solutions which are interconnecting fit each other and that we have some standards that we are sharing. Some things are very local and not interconnected, however, and there you can give more voice to citizens. That is the point.

Mairead Farrell (Galway West, Sinn Fein)
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I thank Dr. Ehnts for attending today and for his engagement with the committee.

Dr. Dirk Ehnts:

It was an honour. Thank you.