The Currency Finance Correspondent Sean Keyes reports on a briefing hosted by Cantor Fitzgerald Ireland.

It says something about Paschal Donohoe that he’s likely to be reelected as President of the Eurogroup because times are dangerous and uncertain. This was part of his pitch. He’s viewed by his fellow finance ministers as a safe pair of hands. He stands unopposed for the position and is likely to be ratified this coming Monday. It will be his second term.

It’s a new phase in Donohoe’s career. In a little over two weeks, he will step back as Minister for Finance, after five years in the job. He’s expected to take over as Minister for Public Expenditure and Reform.

On November 28th, Donohoe took time to talk to Ian Kehoe and a room full of Currency subscribers at the new offices of Cantor Fitzgerald on St. Stephen’s Green after being introduced by the stockbroker’s chief executive Ronan Reid.

Donohoe is good at keeping perspective. He was at the coalface for Brexit, the pandemic, the Ukraine War and the rise of Trump. These were big and strange events. A politician would be forgiven for thinking they were extraordinary in their bigness and strangeness.

But the minister pushes back on the idea that we’re living through an extraordinary time of crises. Yes, he says, it’s been a turbulent couple of years. But we shouldn’t allow ourselves to believe the system has gone off the rails. The world went through worse in the 1950s, 60s and 70s.

He pushes back on the narrative because he believes in centrism, and centrism doesn’t work if we think we’re in a perpetual state of crisis. If a narrative of perpetual crisis gets hold, he said, “the consequences for the European project and for the future of centrist politics is unpredictable, and maybe even dangerous”.

He says “I’m a strong believer in the political center. Society, families, and businesses, can only make progress… if we make the case for where we are in Europe, and a certain tone of politics”.

If you want to defend the center ground in Ireland, Donohoe’s next job as Minister for Public Expenditure and Reform is a good place to start.

Fundamentally, the protests on Ireland’s streets aren’t directed towards the Department of Finance. People aren’t protesting unemployment or emigration. People are protesting over infrastructure. The physical fabric of Ireland isn’t up to scratch. It hasn’t kept up with employment. It’s true of housing, of course, but much more besides.

This, he said, is the big lesson he’s taken from his time in government: the central importance of public investment: “Your level of public capital investment, and your ability to maintain it, and get good value out of it, has such a profound effect on how your economy performs and how your society feels.

This conversation has been lightly edited for clarity.

Ian Kehoe (IK): To begin with, Minister, you seem to have pulled off one of the great Houdini acts of politics by being on the cusp of reelection as President of the Eurogroup.

Paschal Donohoe (PD): It has to be ratified on Monday in Brussels around five or six o’clock next week. And I wait for that moment until it’s clear to me if I have been reelected. Because just as Ronan [Cantor Fitzgerald CEO Ronan Reid] made the point about non-linearity in financial markets, the same thing can happen in politics. That being said, it is a very significant development that no other government has put a candidate forward. In terms of the case I’ve made so far, it is centering on two key points.

The first one is the mandate that I asked for in 2020 – what I said I would do in 2020. I’ve now gone up to the end of 2022. So I said to my fellow finance ministers that I would do particular things, and I’ve done that. That has all been around a style of working with the Eurogroup, and a way of engaging with the Eurogroup.

The second case I’ve made is to make a case for continuity and stability when there is a difficult and potentially dangerous change in Europe.

While we think we have a considerable inflation challenge in Ireland, you can notice the spread of inflation rates, all of which are attributed to what has happened with the war. Then the different forms of energy use depending on the structure of an economy. The defining challenge of 2023 will be whether we can develop a common budgetary response to that within the euro area, to avoid national governments putting in place measures that contradict each other and add to our inflationary risks.

So it’s not as stark a challenge in some ways, as the Covid crisis of the second quarter of 2020. But it’s phenomenally complex and deeply risky. While I’m confident we can get through it and make the right choices, it’s going to require a lot of work and a lot of important decisions at the national level are in the first half of next year. That is the big challenge. Beyond that, we’re going to have Croatia joining the euro on the first of January. Then we have big discussions regarding the future of the euro on the global stage, which relate to climate and relate to the digital future of the euro. But they are medium-term really important strategic projects; the first order one will be what’s happening to the economy of the euro area.

A time of crises

IK: We talk about crises. Stephen Kinsella has talked about polycrisis. Ukraine, in your mind, is the big one. Are you concerned about what’s going on in tech?

PD: So firstly, I made the counter challenge to the polycrisis narrative and I’d make a strong counter-challenge to it. Because I do believe that is a narrative, that if it gets hold of as being the mainstream background to Irish and European politics, I do believe the consequences of that, for the European project and for the future of centrist politics, is unpredictable, and maybe even dangerous.

I push back against that narrative, not for personal reasons, because God knows, the last few years have been quite a challenge. But I push back first against it on historical grounds. And I’d push back against that on economic grounds. So on historical grounds, if you look at the frequency of economic and political shocks we’re now dealing with, that has an awful lot in common with the America and Europe of the 1960s, 1970s and 1980s.

Maybe the exceptional period is the one that went before this time, as opposed to this time. If you look at, for example, American politics in the 1960s and 1970s, it saw the assassination of a president and the murder of his brother. It saw massive civil rights and civil order and civil law forces go right through American politics. If you look at European politics and what we are now dealing with at the moment, of course, Brexit has had a profound effect on Europe. But the 1990s and the late 1980s were full of massive political events that Europe had to respond to.

Economically, yes, the pandemic, in particular, was a massive, massive economic shock. But the recovery from the pandemic was far stronger than many would have expected. Even up until recently, if you look at where we are now, with the effect of the war on the European economy, employment is still at a record level, despite inflation being at a level that normally is consistent with rapid contractions and employment.

So I just think when we’re talking about the era of a polycrisis, we do need to be open to the fact that maybe what is now happening is we are moving back into a rhythm that is consistent with the frequency of economic shocks since World War Two. If it is a period of poly shocks, maybe the period in between could also be periods of opportunity, and recovery, and stability. So all that being said, the war is an extraordinary, world-changing economic and political shock. We should be under no illusion that it has remade Europe and will remake the world. But I just want toframe it against the fact that lots of the things that we’re dealing with have a rhythm in history.

Forecasts

IK: I want to come to corporation tax in a minute. But first, I want to talk about the tech shock that we’ve seen. But briefly, Minister, your economic outlook for 2023. All of those things considered, where is your mood?

PD: So I’m always very optimistic. That’s the first thing to say. I am always very personally optimistic. I always believe that it is possible to make progress against any challenge. I believe there is little in politics or in life, that is final. There are always opportunities. There are some things that are final. But not all.

I’m also very conservative when it comes to economic forecasts and modelling. God knows I’ve been proven right in that over the last few years. Our forecast for next year is currently one of a very low level of growth, as opposed to an actual recession or contraction. We see the economy for Ireland next year as growing but by around one per cent. And just to put that figure in context, for the last few years, if you look at the different measurements of how the Irish economy has performed, it’s been anywhere between four to six per cent. So from four to six to one is quite a correction. But it is currently one of low growth, and high inflation, lower than now. And for next year, probably not as much employment growth, but stability around the very high level of employment.

The technology shock

IK: We’ve been talking for a number of years about Ireland’s potential over-reliance on a concentration of corporate taxpayers. And we’ve seen some issues. Is there a concern about what’s going on at Meta, Twitter, and all of those companies in recent weeks?

PD: Of course, I’m concerned, but I expected this to happen. This is why I have spent years making the case for budget surpluses or national reserve funds. If you ever wanted a reminder of why it is worth putting €6 billion euro into a national reserve fund, it is the changes that are now taking place in the global economy.

But all that being said, if you look at the change that has happened in the tech sector in Dublin in particular, even if all of the redundancies that we are now talking about come to pass. We will have a tech sector in Ireland that will be massively bigger than it was in March 2020. So what I see happening at the moment is undoubtedly – and I feel for everybody who’s involved in this – a reduction in employment levels, and a reduction in employment levels that will happen. But against a sector that is hugely bigger than it was before the pandemic hit Ireland. Actually, even with the change that is happening at the moment, I believe the future for the Irish tech sector is very bright. We should be very confident about this.

The reason for that is one of the two big secular changes that are going to happen to our world is we are going to have a more digital economy in a decade’s time. For all of those reasons, those forces will point towards economies that will be more digitised that Ireland can do well in. But it will be smaller than we would have hoped for, but far bigger than it was. Regardless of all that, I’ll still be making the case for not spending all the money at once. Because the moment will come when that correction happens in our CT receipts – and I’ve been around for the last correction that happened in tax revenue – and when that happens, I want us to have a reserve fund to help us pay for it.

Corporation tax reform

IK: One of the big themes of your time in the Department of Finance has been the shifting of Ireland’s position on corporation tax. We were very defiant. You’ve offered a more conciliatory tone and engaged. Where are we now with corporation tax reform?

PD: It has been one of the biggest projects of my years in Irish politics and deservedly so because it’s such a massively sensitive economic challenge for us. Where we are globally is the OECD process and corporate tax reform continues to make progress. But critically, pillar two is about the rate. It really has to be tested to see if it can deliver. I continue to believe that before Christmas, the European Union will agree on the minimum effective tax directive for the European Union of 15 per cent. I believe that it is in our best interest that that agreement be reached. The reason for that is, even with all of the challenges regarding consistency, and by consistency, I mean whether everybody has done exactly what they were meant to do with the OECD templates. If pillar two collapses, we will go right back to where we were on tax in 2018 and 2019, where every country will probably go ahead and do its own thing. If that happens, the risks for small open economies like the Irish economy will be, I believe, very considerable. So for all of those reasons, progress on the rate is in our interest. And I do believe that will happen.

The weight of the office

IK: The room next door to your office in the Department of Finance has portraits of all the former Ministers for Finance since the foundation of the state. What’s really interesting is how few of them there have been. When you consider some of the other government departments, it can be like a Lanigan’s Ball. But we’ve had solidity in this government department. So you served your apprenticeship with Michael Noonan while you were in the Department of Public Expenditure and Reform, and then you took over as Minister for Finance. When you walked into that big sweeping office that first day, what was going through your head?

PD: I was incredibly lucky that the two great sponsors of my political career were Enda and Michael Noonan. They gave me support and challenged me. That was all that I could have hoped for. When you walk into that office, and in particular when you walk into the portrait room, it is surrounded by portraits of my predecessors, you just feel such a solemn sense of responsibility. It is incredible.

The two defining feelings of my political career, everything I felt and went through in my constituency in the aftermath of the global financial crisis, was an absolute determination that we would never be in that place again.

Secondly, is realising that as Minister for Finance, the responsibility for financial stability sits with you. That is quite a feeling. And I feel it, I felt it every morning for five and a half years. It’s one of the first things I think of. I get an update every morning, called the National Risk Report. But it’s when you get it and realise that this is what you have to play a role in, is quite a feeling. Walking into that room and feeling that – Ian, you’ve been in it many times – is a humbling moment. And I have felt that moment every morning now for over five years.

IK: When you went into that office for the first time, what did you want to accomplish?

PD: At that point, I would have been Minister for Public Expenditure for around a year. The big challenge across that period that informed what happened for a few years after that was the understandable and legitimate weight of public expectation after the global financial crisis. Trying to find an equilibrium between meeting those needs, continuing the recovery in our public finances, and trying to get that balance right. Really what I had in mind, across that period, were two figures: where I wanted our deficit to be, and how many people I wanted to be at work in Ireland. They were the two figures that drove me all the way up to that day when Brexit happened.

New job

IK: I don’t think it’s sort of come as a shock to anyone in this room, but you’re going to be moving portfolios. You’re going to move back to public expenditure and reform. What are the lessons you’ve learned from your time in the Department of Finance Over the last five and a half years?

PD: In terms of moving to DEPER, if that happens, it’s the value of public expenditure. My great lesson, and there are so many of them from the globalfinancial crisis and the aftermath, is your level of public capital investment, and your ability to maintain it, and get good value out of it, has such a profound effect on how your economy performs and how your society feels.

So many of the challenges that we have now are attributed to how our public capital investment declined for so many years, and the huge difficulty we had in catching up with that deficit. And just to put that figure into context, in 2016, the public capital investment in the Irish economy was €3.6 billion euro. In 2022, it was above €12 billion. So it has tripled in six years, and maintaining that level and getting the value, we need it because, at a time of high inflation, I see it as being central to the success of our economy, and the performance of the government for the coming years.

IK: But even at that, we saw protests on the streets over the weekend about housing. While capital spending has gone up, it seems as if an awful lot of people aren’t feeling it?

PD: They are not, and I accept that. I also have the parallel difficulties and East Wall now, regarding the movement of migrants and refugees and people seeking asylum into communities. This is now playing out all over Europe and it has developed in many other parts of Ireland. I accept your point. Even though some can see more houses being built, they’re not seeing them being built in the numbers they want.

They’re not seeing it lead to the improvement and affordability that all want. That challenge is really acute as we move into a world regime change with regard to interest rate levels and the price of raw materials. And it will continue to be the central domestic project of the government regarding how we make progress in the next two years.

Decision making at the top

IK: But just to follow on with that. In the last election, a lot of people felt disenfranchised. As the Minister for Finance, you’re deciding where to allocate money and how much to allocate. If you’re running a business, you can make decisions – but you’re not running a business. You’re running a political economy. How do you weigh up those choices?

PD: The experience of my constituency is just invaluable in doing that. Because I represent Dublin Central and I have been uniquely privileged – I’m always grateful for it – to now be in my third term representing Dublin Central in Dail Eireann. In my first number of years in the constituency, Bertie Ahern was in it. And in recent years, Mary Lou McDonald was in it. So I have regular daily experience of the concerns that have led to that change in how people view politics.

And you’re right, I don’t run a business. I don’t have a balance sheet. Fundamentally I have to maintain consent for running a mixed economy. And that is one of the many differences between politics and running a business. It is on my mind all the time in budget decisions that I make.

IK: If you were to go back and write a letter to yourself five years ago when you walked into that office, what advice would you give yourself at that time?

PD: So Michael Noonan gave me a piece of advice, years ago, the value and wisdom of which has only grown. He said to me “if you can imagine it, it can happen”. And what I’ve learned is “even if you can’t imagine it, it can still happen”. If I was to write that letter, I would put in big bold letters, “Dear Paschal – [that message] – Best Wishes.” Because that has been my abiding experience. Did I ever think I would see a pandemic have such an effect on the lives and livelihoods of people? I frankly didn’t. Did I think the war in Ukraine, which in some ways was far more predictable than a pandemic, but did I think I will be dealing with the consequence of a war in Eastern Europe in an economy in the west of Europe? No. And then with Brexit, while I hoped it wouldn’t happen, I still thought it was possible. But I didn’t think it would happen the way it did. And I certainly never saw Donald Trump coming.

Donohoe’s philosophy

IK: I remember being on one of Katie Hannon’s radio shows, after one of your budgets, and they asked me to describe it. And I said it was a budget of gradual incrementalism. And you took it up with me afterward. What has been the theme throughout your budgets, of what you’ve tried to achieve?

PD: So I’m a strong believer in the political centre. Society, families, and businesses, can only make progress in a world like this, if they get the best out of each other and if we make the case for where we are in Europe, and a certain tone of politics. That has been percolated through every single one of my budgets. So an utter commitment to financial stability, and stability in our public finances. While recognising at the same time, I have to maintain political consent for that argument and that balance. Always inching towards a goal of financial stability. And trying to make progress on the things that matter in people’s lives and it’s a never-ending journey. You’ll never get there. Because the world never stops changing.

The next big idea

IK: Ireland’s had a number of big ideas in relation to our economy. FDI is one, and we’ve seen how well that’s worked out. And we’ve banked on pharma, big tech. What’s the next big idea to drive us forward?

PD: So I believe there are two big ideas. It is up to Ireland, whether we can be on the right side of them. And then up to the government to provide leadership skills. We are, I believe, in the early phases of a period of unique historical change. The lesson of history is so clear that after pandemics, societies fundamentally restructure. We are in one of those windows. We have a war going on. And we have the demands of climate and digital change happening at the same time. Any one of those forces could lead to change. And we have four of them happening at the same time. Where I want our economy to be and our country to be, is if you look at all of the big ideas that are on the right side which is: widespread education; the development of the single markets; and then it has been the development of a global economy. We’ve been on the right side of the three of those. The next two big moments will be moving towards lower carbon economies and the revolution that is now taking place in relation to the supply of energy. And then the change that will happen in all of our lives, due to the acceleration of artificial intelligence and quantum computing and other technologies like that. I want to be on the right side of both of those. I believe we can be on the right side of both of them by using our role and our destiny as members of the European Union, to help us navigate our way through those periods of change. If we do that, I think we have an extraordinary opportunity ahead of us, if we don’t do it, we will be overtaken by other countries. And we’ll see the impact on our living standards. That’s what I think it is.

Taxes and the size of the state

IK: So you mentioned Covid 19. You mentioned a few times the power, the size and the scope of what the state could achieve during that period. But it also dramatically increased the size of the state. The state became bigger. And it’s baked into the system now. The state will be bigger going forward. But it has to be paid for. Do you think we’ve had that conversation about how we’re going to pay for it? Because as soon as you talk about tax rises, people say “Not for me!” When we want a bigger state, and yet we don’t seem to want to pay for it, how are we going to have that conversation with ourselves?

PD: I think we will. That conversation is unfolding and will unfold even more in the years ahead. But I think we also need to be a little bit more precise in thinking about the growth of the state.

So if you look at the growth on the state post and during the pandemic, that shift in growth has happened. On the other hand, the two big massive chunks of expenditure growth during the pandemic – which is the employment wages subsidy scheme, and the pandemic unemployment payments – are now completely gone. So actually, we have had a change in the growth of the state and the size of the state. But it hasn’t been of the scale that some would have anticipated in the depths of the pandemic. I remember when I was launching the employment wage subsidy scheme and the pandemic unemployment payment. The first two things people always said to me is, ‘you’ll never get out of them. And when you can’t get out of them, austerity will come back.’ And we got out of them, and austerity has not come back.

But that being said, yes, we do need to change, we will need to consider choices in the future. The one that I’ve personally been committed to is increasing the carbon tax. I’ve increased the carbon tax now in all of the recent budgets that I’ve done. And I’m going to continue to make the case for that. Because I see it as being fundamental to how we generate the resources to invest in the energy revolution that’s now taking place. And a fundamental sign of honesty to our country, regarding the need to change our use of energy. I believe I’ve made the case for that now. We put up carbon tax in the midst of a cost of living challenge on budget day. And that alone is a sign I think of my willingness to engage in that debate.