Eurogroup Statement on the Draft Budgetary Plans for 2021

16 December 2020

The Eurogroup welcomes the Commission’s analysis of the budgetary situation in the euro area as a whole and its Opinions on the individual draft budgetary plans (DBPs) of the euro area member states. This exercise is key to the coordination of fiscal policy in the euro area.

1. The euro area economy continues to experience the negative economic effects of the COVID-19 pandemic, with real GDP estimated to decline by 8% in 2020 in the Commission autumn forecast and with low inflation. While a return to growth is projected at about 4% in 2021, uncertainty and risks remain exceptionally large. The recovery is expected to be incomplete and uneven across member states, and the economy continues operating below potential. Financing conditions are expected to remain favourable over the forecast horizon, according to the Commission forecast.
   
   
2. Against the backdrop of the general escape clause of the Stability and Growth Pact, activated in March 2020, which will remain active in 2021, all member states have taken swift and sizeable fiscal measures to address the pandemic and its negative economic impact. Expenditure and revenue measures included in the Commission autumn forecast based on the Draft Budgetary Plans amount to 4.2% of GDP in 2020 and to 2.4% of GDP in 2021. These measures are in addition to the normal automatic stabilisers that are also helping to combat the pandemic. Ample liquidity support initiatives for households and businesses have also been put in place.
   
   
3. Most measures in 2020 focused on the emergency response, addressing the public health situation and compensating workers and firms for income losses due to lockdown measures and supply chain disruptions. The focus of the policy response is gradually shifting towards supporting the economic recovery, with two-thirds of the planned fiscal measures for 2021 geared to that objective.
   
   
4. The general government deficit in the euro area is expected to increase significantly, to 8¾% of GDP in 2020 and to improve in 2021 to 6½% of GDP in the Commission autumn forecast. This reflects both the ending of some of the emergency fiscal measures and the assumed economic recovery. In light of the second wave of the pandemic, it may be necessary, however, to extend these measures and additional support could be needed. In some cases, new measures were announced since mid-October, which will weigh further on the deficit in 2021. The general government debt in the euro area is set to rise from 86% of GDP in 2019 to about 102% of GDP in 2020 and 2021. Favourable financing conditions help contain debt-servicing costs over the forecast horizon. The fiscal stance in the euro area is estimated to be highly expansionary in 2020. Excluding the temporary emergency measures, which are forecast to expire next year, the underlying fiscal stance is also expected to be expansionary in 2021.
   
   
5. The Eurogroup agrees that a supportive fiscal stance in the euro area for 2021 is appropriate given the output loss to date and downside risks. Fiscal policies should remain supportive in all euro area Member States throughout 2021. Member States should continue to provide timely, well-targeted and temporary fiscal support, while safeguarding fiscal sustainability in the medium term. The fiscal response going forward should continue to be carefully calibrated and regularly reviewed, in light of the uncertainty associated with the pandemic, changing economic conditions, country specific circumstances and the need to avoid policy cliff edge effects.
   
   
6. Member States should continue coordinating actions to effectively address the pandemic, sustain the economy and support a sustainable recovery. When the epidemiological and economic conditions allow, member states should phase out emergency measures while combatting the social and labour-market impact of the crisis. Member States should pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Credible medium-term fiscal strategies are particularly important in this respect.
   
   
7. The Eurogroup recalls the importance of a growth-friendly composition of the public finances and robust fiscal frameworks across the euro area, which will support recovery efforts going forward and facilitate the green and digital transition of our economies.
   
   
8. The three safety nets agreed by the Eurogroup in April are complementing the unprecedented level of fiscal support put in place by national governments. Moreover, the European Council agreed in July upon the Next Generation EU plan. The successful and rapid implementation of Next Generation EU, including of the Recovery and Resilience Facility, will further contribute to supporting the recovery in the euro area.
   
   
9. We agree with the Commission’s assessment that the individual Draft Budgetary Plans are overall in line with the fiscal policy recommendation adopted by the Council on 20 July 2020. Most of the measures in the member states’ Draft Budgetary Plans support economic activity against the background of considerable uncertainty.
   
   
10. Given the application of the general escape clause of the Stability and Growth Pact, the Commission also assessed the temporary nature of planned measures in member states. We agree with the Commission’s assessment that, in most member states, the planned measures are broadly temporary. We note that some measures do not appear to be temporary or matched by offsetting measures in 2021 according to the Commission assessment. Even if those measures may address structural shortcomings, permanent measures that are not planned to be financed by revenue increases or compensatory expenditure reductions may affect fiscal sustainability in the medium term.
    
    
11. The Eurogroup notes the Commission’s assessment that for member states that already had high levels of government debt and high sustainability challenges in the medium-term prior to the COVID-19 pandemic, it is important to ensure that, when taking supportive budgetary measures, fiscal sustainability in the medium term is preserved.
    
    
12. We note that Lithuania submitted a Draft Budgetary Plan on a no-policy-change basis and we invite Lithuania to submit an update as soon as possible.
    
    
13. The Eurogroup welcomes the Commission’s intention to take stock of the application of the general escape clause in spring 2021 and reassess the budgetary situation taking into account updated macroeconomic projections.

Eurogroup

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