Eurozone governments must continue to work on reducing inflation - Eurogroup president

RIGA - Not only the European Central Bank (ECB), but also eurozone governments should continue working to reduce inflation, Eurogroup President and Minister for Public Expenditure, National Development Plan Delivery and Reform of Ireland, Paschal Donohoe, told LETA in an interview.

The Eurogroup president, who last week met with central bank governors and finance ministers of the Baltic countries, stressed that interest rate decisions were a matter for the ECB.

"But what we can do to help bring down inflation is to avoid increasing demand in our economies through the budgetary decisions we take. Reducing inflation is not just the ECB's responsibility. It is also the responsibility of finance ministers. If we can reduce borrowing and thereby help to reduce inflation, this in turn could allow the ECB to take different decisions on interest rates in the future. But the main thing is to reduce inflation first," Donohoe stressed.

The Eurogroup president said that he believes that euro area countries have shown that they can strike a balance between recovering from a pandemic and maintaining economic growth in a time of war, while remembering the need to reduce borrowing.

He pointed out that two years ago, the average level of national budget deficits in the euro area was around 8 percent. It then fell to 5 percent and is now around 3 percent.

"This means that national deficit levels have come down. At the same time, the euro area has avoided the recession that many predicted was inevitable and has maintained very high employment levels in many countries, including here. So I really believe we have done a very good job in ensuring budgetary discipline at a time when there are many major economic shocks," said Donohoe.

He also pointed out that the challenge now is to continue to reduce borrowing and avoid increasing demand in 2024 and 2025. "If we can do that, it will in turn help us to reduce inflation and stop living standards falling as they have in recent years when inflation was so high," Donohoe explained.

Asked whether the turmoil of recent years had put non-euro area EU countries in a better position to react more flexibly to events, Donohoe denied this.

"If I look at the experience of small economies like Ireland or Latvia, I am convinced that if we still had our own currencies, they would still be pegged to larger currencies and we would still not have the exchange rate flexibility that some might imagine. Being in the euro area gives our exporters a stable currency value. Being in the single market and the single currency area provides greater stability and the ability to sell to other euro area countries. The fact that Latvian exporters who sell their goods in Germany can be settled in the same currency provides enormous stability. For all these reasons, I think the euro has been an important instrument of stability during these very volatile years," Donohoe stressed.

He was confident that if Latvia continues to pursue sound policies, the economy will grow faster in 2024 and inflation will continue to fall, which in turn will have a very strong and positive impact on living standards and employment.

The eurozone includes Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.