27 April 2022

European Commission: Fiscal Sustainability Report 2021

EXECUTIVE SUMMARY

1. MONITORING DEBT SUSTAINABILITY RISKS REMAINS ESSENTIAL

After a severe recession in 2020 prompted by an unprecedented pandemic,

the EU economy strongly rebounded in 2021, with a GDP growth rate of 5%,

higher than expected in earlier Commission forecast. (1) This vigorous

rebound was largely driven by the successful vaccination campaigns in many

EU countries, allowing a progressive easing of restrictions since last spring.

In early November, economic activity in the EU was projected to expand

solidly in 2022, notably supported by the full deployment of the Recovery

and Resilience Facility (RRF). In 2023, real GDP growth was expected to

remain robust at 2½%. Thanks to the strong and well-coordinated EU crisis

response, the damage to the EU economy so far appears considerably less

than initially feared. This report is based on the Commission Autumn

forecast. Since then, the invasion of Ukraine by Russia has been a watershed

moment, increasing risks surrounding the economic outlook. Specifically, the

strength of the recovery remains dependent on future developments related to

the COVID-19 and, importantly, to the geopolitical situation. Amid high

uncertainty, economic risks notably relate to the aggravating and protracted

supply constraints and bottlenecks, as well as surging energy and food prices

constraining growth and fuelling inflationary pressures.

In 2020, the sharp economic downturn and forceful fiscal policy response led

to an unprecedented increase in headline deficit and debt ratios in the EU. In

particular, the EU aggregate government deficit increased from a historically

low of around 0.5% of GDP in 2019 to around 7% in 2020. It is forecast to

have narrowed marginally in 2021, notwithstanding continued discretionary

fiscal measures to shelter households, workers and firms from the impact of

the COVID-19. On the basis of the Commission Autumn forecast, the

aggregate budget deficit in the EU is forecast to halve in 2022, and on an

unchanged policy basis, further decrease to 2.2% in 2023. The aggregate

government debt-to-GDP ratio of the EU rose by over 13 pps. in 2020,

reaching around 92%, mirroring the spike in deficits, as well as temporary

unfavourable interest-growth rate differential (snowball) effect. The EU

aggregate debt ratio in the EU is expected to only slightly decline by 2023,

but it should remain (well) above 100% of GDP in six Member States

(Belgium, Greece, Spain, France, Italy, and Portugal). The invasion of

Ukraine by Russia significantly increased risks surrounding this outlook, with

an expected increase of defence spending and necessary accompanying

measures to cushion the impact of the crisis (e.g. heightened energy prices)

and support energy diversification.

NextGenerationEU (NGEU) allows supporting all Member States, in

particular those hardest hit by the COVID-19, with a €806.9 billion fund. (2)

Its centre piece, the Recovery and Resilience Facility (RRF), which entered

into force in February 2021, provides financing support to reforms and

investments in Member States until end 2026. In particular, the RRF aims at

making European economies and societies more sustainable, resilient and

better prepared for the challenges and opportunities of the green and digital

transitions. This joint, coordinated action at the European level, benefits all...

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