08 September 2022

European Commission: Closing speech at Bruegel annual meeting

Good afternoon. It is a real pleasure to be here today to close this year's edition of the Bruegel Annual Meetings.

Let me begin by taking this opportunity to thank Guntram Wolff for his leadership over the past decade. During this time, Bruegel has firmly established itself as Europe's leading economic think tank and one of the best in the world.

And let me also congratulate Jeromin Zettelmeyer for his appointment as new Director. At such an important juncture for both the European and the global economy, Bruegel's critical analyses and ideas will be needed more than ever – so let me wish you every success!

Today, I would like to touch on three topics:

• the current economic outlook;
• the ongoing policy response; and
• our priorities for the coming months.

[Economic Outlook]

We may well be heading into one the most challenging winters in generations. A number of warning lights are flashing red: energy prices have shattered new records, inflation has continued to climb and economic sentiment is deteriorating. And the Russian war continues.

Developments in European gas markets have dominated the headlines in recent weeks. At the end of August, the TTF gas price stood at more than 15 times the pre-pandemic price, and almost twice the level recorded when we published our Summer Forecast – just two months ago. 

Inflation levels in the euro area have continued to rise and now stand at 9.1%. Energy prices remain the main driver of inflation, but price pressures have broadened in recent months. Core inflation is at 5.5%, the highest point since the introduction of the euro.

Survey data point to a worsening economic outlook:

• Our Economic Sentiment Indicator as well as other indicators, like the PMI, are heading in the wrong direction.
• Financing conditions are tightening, both in Europe and globally.
• The euro has slipped below parity with the dollar for the first time in twenty years.
• And developments in the US and China mean external demand will remain weak.

And yet, it's not all doom and gloom. In the first half of the year, the European economy performed better than what many – including ourselves – were expecting: EU GDP grew by 0.8% in the first quarter and another 0.7% in the second quarter. This means that EU GDP is now more than 2% higher compared to pre-pandemic levels.

Labour markets are also performing well. The unemployment rate has decreased further and in July stood at a historic of low of 6.0%.

On the energy front, we have already reached our gas storage target of 80%, two months before the deadline we had set for the end of October. Oil and food prices have come down from recent highs. And supply chain disruptions are easing, as port congestion in the US and China decreased significantly. These developments will reduce inflationary pressures, so inflation may have reached its peak.

Uncertainty remains exceptionally high and the risk of a recession is rising. The outlook crucially depends on developments in energy markets:

[Policy response]

Given the level of uncertainty, extending the application of the General Escape Clause was the right thing to do. I know there are different opinions but I am more than ever convinced that it was the right thing to do.

But we now need to make sure that fiscal policy does not increase inflationary pressures. The goals of fiscal policy in this phase should be three-fold.

First, to protect the most vulnerable from the impact of high energy prices. Measures should be temporary and compatible with the green transition. And better targeted: three quarters of the measures taken so far are untargeted.

Second, to provide humanitarian assistance to those fleeing Ukraine.

Third, to expand public investment for the green and digital transitions, and for energy security.

These are three simple goals for fiscal policy.

The EU has made very good progress in reducing our dependence on Russian fossil fuels. Diversification of supplies has resulted in a substantial increase of non-Russian LNG [+57% year-on-year], meaning we were able to make up for the reduced imports from Russia.

Gas consumption dropped by 14% between March and May 2022 compared to the same period in 2021. Gas storage levels could reach 90% by November. Accelerating the roll-out of energy efficiency measures and boosting the uptake of renewables must also continue at full speed to reduce fossil fuel consumption. And we are at a turning point. We are overcoming our divisions. Now, finally, action is also possible to limit the price of Russian oil and gas and to find ways to intervene in the energy market to decouple electricity and gas prices.

In parallel, the implementation of Member States' recovery and resilience plans is continuing. We have so far disbursed € 113 billion to Member States and we expect more payment requests soon. And RRF investments are starting to have tangible effects on the ground.

[Future priorities – economic governance review]

Going forward, delivering on what we have agreed on – from the RRF to REPowerEU – will be key. But implementation is not everything. We must continue to raise the level of ambition to make progress in other crucial areas.

One of my top priorities for the coming months is to move forward quickly with our economic governance review. Let me recall the context which, in my view, calls for a reform of our rules.

Our economic governance framework has become far too complex and hard to navigate. It relies on unobservable and backward-looking indicators. National ownership has been too low and enforcement insufficiently effective.

The pandemic has left a legacy of significantly higher public and private debt levels. The need to re-build fiscal buffers is clear. But debt reduction strategies must be realistic if they are to ensure stability and support growth.

At the same time, the challenges of the twin transition and the new geopolitical landscape compel us to undertake major investments and reforms. We have two mountains before us, a mountain of debt and a mountain of investment, and how we reconcile these is a key challenge we must address in the reform of our rules.

So what we need is a governance framework that allows us to better respond to our common policy priorities and the challenges of the next decade.

Since we relaunched the debate on the review of the governance framework in October last year, we've had very constructive discussions with governments, fiscal authorities and the broader policy world. Let me also thank Bruegel for its contribution to the debate.

One year later, it's time to draw our conclusions. In the coming weeks, we will put forward our orientations on possible changes to the framework.

Simplification, stronger national ownership and better enforcement will be the defining features of an improved framework, with the overall objective of supporting debt sustainability and sustainable growth.

One way to do so could be to move towards medium-term macro-fiscal plans that set net expenditure paths over several years and are consistent with the convergence of debt to prudent levels.

Having one expenditure indicator could go a long way towards simplifying the system, while keeping the focus on fiscal risks.

Medium-term macro-fiscal plans could also include investment and reform commitments reflecting EU and national priorities and high-level guidance to Member States. The design, governance and operation of the Recovery and Resilience Facility is a useful blueprint in this respect.

To ensure greater national ownership, Member States could be granted greater leeway in proposing fiscal trajectories, provided common EU principles are respected, not least debt sustainability.

For example, reform and investment commitments could allow for a longer fiscal adjustment period. This would also be a way to ensure fiscal sustainability and growth can be mutually reinforcing.

A greater ex ante national ownership of the design of fiscal trajectories could be balanced by a stronger ex post enforcement at EU level – this is the potential deal, in substance.

I believe that changes to our fiscal rules in this sense, accompanied by an improved macroeconomic imbalances procedure, could deliver a more coherent and integrated framework for economic governance. And I believe that these elements could gather broad support among Member States. It's time to move on, leaving behind the traditional divide.

Moving quickly towards a common understanding would also send a strong and reassuring message to markets. Let me recall that the ECB has pegged its new ‘Transmission Protection Instrument' to compliance with our common fiscal rules (among other things). So to have

So to have new agreed fiscal rules is also important in this respect.

[Conclusion]

Winter is coming. The European economy is facing serious challenges. While 2022 as a whole will be a strong growth year, the momentum is slowing and a recession in cannot be ruled out.

High energy prices will test our economic and social fabric. But if we remain united, ambitious and ready to intervene as needed in a spirit of solidarity, we can ensure that the coming months will not be remembered as the winter of our discontent – but as the harbinger of a new European spring.

Bruegel

© European Commission