Ireland wins euro zone's top job in blow to high-indebted nations

  • The European Commission downgraded its economic forecasts for the region earlier this week, and now expects the euro zone to contract 8.7% in 2020.
  • The International Monetary Fund, meanwhile, said in June that the 19-member region could shrink by 10.2% this year.

The Irish finance minister has been elected to the euro zone's top position, in a defeat for Germany and France, as well as the highest-indebted nations in the region.

Paschal Donoghoe will be the new president of the Eurogroup, which is made up of the 19 finance ministers of the euro area in charge of negotiating aspects of fiscal policy in the bloc.

The decision announced Thursday evening was a blow to France and Germany, who had publicly stated their support for Spanish candidate Nadia Calvino. The most-indebted nations in the region — Greece, Italy and Portugal — had also expressed their preference for the Spanish minister.

"Pressure for fiscal adjustment will likely resume once the recovery takes hold, creating the risk that more vulnerable Southern economies could be forced into fresh tightening at a time when their economies are still reeling from the downturn," analysts at research firm Eurasia Group said in a note.

Paschal Donoghoe, who will start the new role on Monday, has made it clear that the euro area will have to work towards reinstating fiscal targets.

Back in March, the euro area agreed to put these rules on hold so countries would have the flexibility to spend and support their own economies in the face of the coronavirus crisis.

Speaking to CNBC last week, Donoghoe said that reinstating fiscal targets "was not imminent," but the region had to monitor the economic developments and adapt to the situation.

The Irish finance minister has described himself as a "bridge builder," who will look to bring together the fiscally conservative nations, like the Netherlands and Austria, and those that have a looser approach to public finances.

"Building and maintaining consensus on both issues will be challenging, given the uneven shape the recovery is likely to take in Europe," Eurasia Group analysts added.

The European Commission downgraded its economic forecasts for the region earlier this week, and now expects the euro zone to contract 8.7% in 2020. The International Monetary Fund, meanwhile, said in June that the 19-member region could shrink by 10.2% this year.

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