Earlier this year, the Department of Finance announced its expected budget deficit for 2020 to add up to around €19 billion. Yet, expenditure sustained, and the government continued to announce further spending measures to deal with the ongoing public health emergency and to support the economy suffering as a result. This was only possible due to the European Central Bank (ECB) allowing member states to borrow very cheaply at extremely low interest-rates.

This was an unprecedented move by the ECB, a very powerful body that dominates monetary policy in the Eurozone. Associate Professor at the School of Politics and International Relations here in UCD, Aiden Regan, said the ECB ‘responded in a way nobody would have expected a few years ago.’ The College Tribune recently spoke to Professor Regan to discuss the potential post-COVID-19 economy and the political obstacles that could prevent the radical shifts in recent economic thinking from taking hold here.

The United States has led the way in this new economic policy. Led by President Joe Biden, the US Congress passed a $1.9 trillion coronavirus relief package which includes stimulus payments to most of the population and enhanced unemployment aid. Professor Regan said the US is ‘tearing up the rules when it comes to fiscal policy with no intention of coming back to them,’ adding that they can do this ‘because the key difference is the US controls its own currency.’

The difference is the ability of the US government to embark on radical fiscal policy. The Federal Reserve, the central bank in the US has far closer ties to Washington compared to the ties of the ECB to eurozone governments. The independence of the ECB is a defining feature of the institution and one that continues to shape economic policy direction in the eurozone.

While it is easy to view the ECB as entirely centrally run from its headquarters in Frankfurt, in reality, it is a collection of the individual central banks of all eurozone members. Major changes in policy and direction, therefore, are subject to intense scrutiny and often friction between different members. The ECB is also subject to strict guidelines set by the EU, most notably, its key objective of price stability. This has severely restricted its ability to provide national governments with the space to embark on radical fiscal programmes of high government expenditure, an approach that is quickly becoming a major consensus in academic circles in economics and the social sciences.

Professor Regan has noted this shift in economic thinking. He told us that it is largely influenced by ‘what ideas are underpinning these economic policy choices,’ before noting that ‘these ideas are shifting very fast.’ According to Professor Regan, the ECB is aware of what needs to be done but is bound by EU rules. He says that ‘we are at the point where the ECB is bending the rules so much, the rules need to be changed.’

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While the change in rules makes economic sense, the political momentum has so far been insufficient. Regan says governments are ‘terrified’ of the treaty changes required to overhaul ECB policy, because ‘they have to respond to domestic electorates.’

While we are not in a post-COVID-19 landscape yet, the political debates have already begun here in Ireland. Minister for Finance Paschal Donohoe has warned this month that ‘we will soon need to manage our finances differently’ and stressed the need ‘to reduce our deficit over time.’ Tánaiste, Leo Varadkar, also warned last week about the dangers of a rise in the interest rate and inflation.

Professor Regan has hit back at this kind of thinking, however. He rejected the simultaneous concerns over debt levels and inflation saying, ‘if you are worried about public debt you would welcome inflation, it would allow you to bring down that debt.’ He admitted that these ‘are complex issues, technically and politically,’ but criticised the government for using the inflation argument after ‘shifting the goalposts,’ away from their previous warnings about interest rates and debt levels.

There have been some moves, however, and Professor Regan notes it is broadly accepted that austerity ‘was an extremely reckless economic policy,’ adding that ‘no minister for Finance is going to dare to go down that path again.’ He highlighted other forms of raising income like introducing a wealth tax and expanding property taxes as ‘mechanisms to fund the expenditure government needs to provide public services.’

‘From my perspective, we should go out and borrow as much as we can to build the infrastructure that is needed,’ said Professor Regan. He highlighted the investments needed in Dublin city, in the area of housing and in efforts to tackle climate change. He notes ‘that governments don’t have that capacity going forward,’ without rule changes at the ECB, enacted by treaty changes at the EU level.

When talking about the potential for these radical macroeconomic ideas taking shape, Professor Regan said, ‘the whole language and discourse needs to change,’ which would allow ‘from a political perspective, these changes to take effect.’ He criticised current measures of wealth, spending and investments as outdated and not relevant to ‘the realities of the modern economy.’

Clearly, the COVID-19 pandemic has fundamentally changed the economy as we know it, and a governments role in that economy. However, hopes of a long-term, meaningful shift is unclear. As we have seen, it is not just an economic debate. Particularly in the EU, it is a far more contentious and divisive political struggle.

Conor Paterson – Features Editor