03 March 2021

EURACTIV:Commission wants to keep fiscal rules suspended in 2022

In spite of the roll-out of the vaccines, and the expected arrival of the EU’s recovery funds in the second half of the year, there is still a “substantial level of uncertainty”, said the Commission’s executive vice-president for Economy, Valdis Dombrovskis.

The European Commission said o that the Stability and Growth Pact should remain suspended next year as Europe’s economy needs additional stimulus to return to its pre-crisis level.

With prospects of economic recovery still fragile, the Commission wants to maintain activated in 2022 the escape clause of the Stability and Growth Pact, suspending the rules that control national deficit and debt levels. 

Last March, at the onset of the pandemic, the EU executive took the unprecedented step of suspending the EU fiscal rules. 

“One year on, the battle against COVID-19 is not yet won and we must ensure that we do not repeat the mistakes of a decade ago by pulling back support too soon,” said Commissioner for Economy Paolo Gentiloni.

“For 2022, it is clear that fiscal support will still be necessary: better to err towards doing too much rather than too little,” he added.

In the aftermath of the 2008 financial crisis, the austerity paradigm shared by Berlin, Brussels and Frankfurt forced an early withdrawal of the fiscal stimulus. The result was a self-inflicted recession in Europe in 2012.

The Commission will wait until May to confirm the decision to keep the escape clause activated in 2022. 

Member states however needed to have a signal about whether the Commission will maintain a loose stance, since they must in April submit their stability and convergence plans, the fiscal path for the next three years.

For that reason, the EU executive published on Wednesday a communication stating that the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) would be the “key quantitative criterion” to decide whether to prolong the suspension of the Stability Pact.

“Therefore, current preliminary indications would suggest to continue applying the general escape clause in 2022 and to deactivate it as of 2023,”  the document added.

The latest Commission forecasts published in February projected that the EU economy would regain pre-crisis levels only by the middle of next year at the earliest.

The Commission said that it will monitor not only how the pandemic evolves to adjust its economic response, but also other issues, such as the interest rates of sovereign bonds, given the higher yields seen in past weeks.  

Dombrovskis told reporters the Commission would monitor “very closely” the evolution of the rates and adjust its policies accordingly. 

While the Commission favours keeping the stimulus flowing, it also recommends countries with high debt levels to remain “prudent” with their expenditure in 2022.

It did not detail at this stage the fiscal path for countries next year, as this will come in late May. 

“Exactly when to start the pivot in the type of measures and when to start giving less to stimulus, and more to fiscal prudence, can’t be answered today,” Gentiloni said. 

But the EU executive said that, as the recovery evolves, the national supportive measures should be more “timely, temporary and targeted.”

In other words, governments should channel their resources wisely towards viable companies in the sectors hardest hit by the crisis, to prevent debt from skyrocketing more than necessary, especially in vulnerable countries such as Italy or Spain.

For these countries, the Commission especially stressed the importance of making good use of the “unique window of opportunity” offered by the Recovery and Resilience Facility, especially its €312.5 billion in grants aimed at spurring recovery. 

These funds won’t add to existing national debt levels and will help to reform the economies and boost their productivity, it added.

Stability Pact review

Last year’s suspension of the Stability and Growth Pact was triggered only one month after the Commission launched the review of the fiscal framework. 

The EU executive plans to put forward a proposal after the summer. The objective is to simplify the fiscal rules, to better incentivise productive investment, especially in times of crisis, and to reflect the new economic scenario, with high levels of indebtedness and lower interest rates. 

The reform of the fiscal rules is expected to trigger an intense debate between Northern countries, which favour a stricter fiscal stance, and Southern countries, which support a growth-oriented framework.

Dombrovskis highlighted that the consensus will be “very important”, to ensure that the end result is supported by all member states. 

The European Fiscal Board proposed last year removing the deficit threshold of 3% of GDP, and introducing a simpler spending rule. The Board also proposed more nationally adjusted paths to reduce debt levels, instead of the 60% target and the rigid adjustment rules attached to it.

EURACTIV

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