Does Ireland favour a euro zone of fiscal prudence or federalised extravagance?

The official reappointment of Paschal Donohoe as president of the eurogroup on December 5th means that Ireland will be disproportionately represented in future euro zone discussions. Yet, the Irish focus on successfully squeezing Donohoe and Michael McGrath around the same table in Brussels risks distracting Dublin from the much more important economic challenge ahead.

Namely, the coming battle between the European Commission and euro-zone members on the future governance of the single currency area. Because while inflation and Ukraine may continue to dominate newsfeeds, it is the soon-to-erupt turf war over the running of the euro that has the potential to return the EU to the bad old days of Greek- (and Irish-) flavoured crises.

So divisive were the disagreements up to 2014 that the evolution of the euro zone’s architecture ground to a stop in the following years. The result is a popular euro currency built on increasingly thin sand

Get ready, because we’re all about to experience a very bad case of euro zone deja vu.

At the heart of these conflicts lies the reality that the EU’s “success” in keeping the euro zone intact has come at a very heavy political cost. So divisive were the disagreements up to 2014 that the evolution of the euro zone’s architecture ground to a stop in the following years.

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The result is a popular euro currency built on increasingly thin sand.

Its structural problems – most obviously the absence of a complementing fiscal union (in the US, the federal government can support state budgets in times of crisis) are well known. But, such has been the political paralysis in Europe that even relatively minor improvements, such as completing the decade-old banking union, remain stuck in eurogroup limbo.

Just ask Paschal Donohoe.

The European Commission’s current proposals are an attempt to simplify the rules of euro-zone membership. Euro members will now have longer time periods to reduce their debt (up to seven years) and can take more ownership in developing how to reduce that debt.

Lessons half-learned

Unfortunately, the EU has only managed to half-learn the lessons of its preceding crises. Because the European Commission is set to remain the key enforcer of euro-zone rules. A job it has spectacularly failed to carry out impartially over two repetitive decades of big-state political influence. Nor will national politicians have any incentive to carry out reforms in the short term: the can will just be kicked from one electoral cycle to the next with no real political ownership.

In this Club-Med idyll, common euro-zone borrowing is an essential part of levelling up southern Europe. Everything from Covid and Ukraine to the European Recovery Fund and climate change will be used as rationales

So Brussels will remain the “bad guy”, an easy punching bag for cheap domestic politics.

The spillover from these debates has already begun. Several member states – Italy chief among them – want to use the proposed “flexibility” as a byword for a bigger, more integrated, more expensive euro zone. In this Club-Med idyll, common euro-zone borrowing is an essential part of levelling up southern Europe. Everything from Covid and Ukraine to the European Recovery Fund and climate change will be used as rationales.

Understandably, such an approach is met with unease in key net-contributor states. For countries such as Germany, Finland and the Netherlands, the vista of a flexible, dubiously enforced euro zone is a recurring fiscal nightmare.

So, after 20 years of the euro, the EU remains stuck in the same continuous cycle of disagreement.

The euro, in a sense, remains a victim of its own survival. Too embedded to be broken up, too politically contentious to really thrive.

Ireland now faces the challenge of defining a clear position on euro-zone reform. Dublin has simultaneously supported fiscal prudence and the introduction of joint EU borrowing in recent years. No mean feat given the obvious contradictions involved.

Apart from the continuous hard selling of “brand Ireland” as an inward-investment, tolerant, humanitarian oasis, Dublin’s input on key EU policy developments is opaque

But, as with corporation tax, Ireland’s flip-flopping on core EU policies can only be justified for so long. The time is fast approaching when Ireland will have to pick a side in the great euro divide. Economically, as a net contributor to the EU budget, Ireland should favour a more cautious, less expansive approach to euro-zone reform.

No middle ground

Alas, Dublin’s political engagement with Brussels continues to be defined by the absence of any clear vision for either the euro zone, or the wider EU. Apart from the continuous hard selling of “brand Ireland” as an inward-investment, tolerant, humanitarian oasis, Dublin’s input on key EU policy developments is opaque.

Ireland has to realise there’s no middle ground left in the battle for the euro’s future.

The real shame of Ireland’s lack of strategic focus is that Dublin has ready-made allies in Europe that also seek a leaner EU, a more efficient euro zone and a Europe based firmly on a renewed transatlantic relationship.

In a newly empowered central and eastern Europe the principles of trade openness and fiscal responsibility have defined economic transformations since the 1990s. For many, Ireland was seen as an exemplar of how a small state could leverage EU membership as a conduit for economic growth, raised living standards and reduced poverty.

As the EU’s response to the war in Ukraine has shown, central and eastern Europe is finally discovering its voice in Brussels. In directly confronting western Europe’s initial reluctance to confront Russia more forcefully, they have managed to tilt the balance of power east in an evolving EU.

Ireland should exploit this opening. Paschal Donohoe and Michael McGrath should look east at future euro-group meetings.

Eoin Drea is a senior researcher at the Wilfried Martens Centre, the official think tank of the European People’s Party of which Fine Gael is a member.