In December 1992, the late Albert Reynolds, then Taoiseach in a Fianna Fáil/Labour government, secured a grant package of €8bn for Ireland at the European summit in Edinburgh.

The money came mainly through the Regional Development Fund, a permanent instrument designed to assist Europe’s poorest areas and a once-off boost to the Cohesion Fund, targeted at just four countries - Ireland, Greece, Spain and Portugal - in preparation for the abolition of national currencies and the establishment of the Euro.

Albert’s €8bn assisted greatly in financing Ireland’s rapid recovery through the 1990s and came on top of generous transfers via the Common Agricultural Policy (CAP).

Economic success

Ireland’s relative economic success in the three decades since has diluted the entitlement to transfers, the CAP reforms have seen the EU agriculture budget shrink and Ireland has become a net contributor to the EU.

The amounts involved are small, since the EU budget is modest: only about 1% of the EU economy’s annual income passes through Brussels.

The response to the COVID-19 crisis has been more national than pan-European

Most countries collect 40% and more in national taxes, with current and capital spending to match. Europe has not moved towards a ‘federal’ fiscal model, with large flows going through the centre.

As a result, the response to the COVID-19 crisis has been more national than pan-European. All countries have been affected and all have embraced far bigger budget deficits than had been pencilled in, letting the automatic stabilisers work (the deficit grows as tax revenue weakens and unemployment benefits rise) and adding fresh expenditure on health and aids to firms.

Those countries with the lowest debt burdens have chosen to add most to deficit spending. Countries such as Italy and Spain, experiencing a heavy toll from the pandemic, have not felt able to add as much to their debt burden as Germany, for example.

Fiscal measures

The measures announced by the European Commission president Ursula von der Leyen are not really material in the overall scheme of things.

The much-touted figure of €750bn includes about €250bn, which will be loaned to member states, adding to debt and they can borrow anyway, while the remaining €500bn in grants will be raised in the markets in competition with the borrowing agencies of member states.

Writing in the Financial Times, economist Wolfgang Munchau estimated that the true fiscal boost coming from the EU’s measures would be about 0.6% of the zone’s national income for each of the next four years.

The deficit will now be at least 12% of national income

This is simply not a big deal – the Irish budget was meant to be in small surplus this year, but the deficit will now be at least 12% of national income with more to come in later years.

Ireland is a net contributor to the EU budget and any debt service cost at EU level will eventually be met by the net contributors, one of whom, the UK, has departed, leaving a bigger share for those remaining.

Capacity to borrow

What matters most for Ireland and the other indebted countries is the retention of their capacity to borrow at affordable interest rates, and that depends on the European Central Bank (ECB).

If the ECB continues to support their sovereign bond markets, all will be well. If not, there could be a sell-off, especially in Italy, and another Eurozone crisis.

Ireland ended up in an IMF programme in 2010 not because it was in breach of EU borrowing rules, but because it could not sell bonds. The EU borrowing rules have been suspended anyway. Retaining the capacity to sell bonds means not trying to sell too many.

Bond market support

The executives at the ECB, including chief economist Philip Lane, are committed to the continued support of the bond markets, keeping interest rates on sovereign debt affordable.

But their position is under assault from Germany and others, who wish to see limits on the expansion of the ECB’s balance sheet. This has led some commentators to predict another crisis and the possible withdrawal of Italy from the Eurozone.

This would be so damaging that one is tempted to dismiss the possibility, but there have been so many spectacularly damaging choices by governments in recent years, including Brexit and the US-China trade war, that further self-inflicted wounds are entirely possible.

The most likely outcome is that the ECB will reluctantly be permitted to do whatever is required, having created gratuitous uncertainty in the markets and political discord within the Eurozone along the way, in a repetition of the too-little-too-late performance from 2009 to 2011.

Against this background, the Irish government, whenever one is finally formed, should plan for a return to budget balance over the medium term.

This will require a willingness to contemplate tax increases and a stringent review of both current and capital spending in due course. Spend for now, but there is no free lunch from Europe.