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We welcome the Commission’s Communication and its Opinions on the individual draft budgetary plans, published on 22 November. This exercise continues to be key to the coordination of fiscal policy in the euro area. We welcome that Croatia as a new euro area member from 1 January 2023 decided on a voluntary basis to submit a draft budgetary plan for 2023.
The euro area economy continued its strong post-pandemic recovery in 2022, thanks to the swift policy action at national, EU and euro area level, and in spite of the economic impact of Russia’s war of aggression against Ukraine. At the same time, high energy price pressures, the erosion of households' purchasing power, a weaker external environment and tighter financing conditions are taking centre stage and heading into 2023, economic activity is decelerating. The euro area and most Member States are at the risk of experiencing a technical recession this winter, with growth projected to return in spring. As the economy adjusts to the rapid succession of two severe shocks, macroeconomic forecasts continue to be surrounded by large uncertainty. The labour market remains a source of resilience going forward, having benefitted also from short term work schemes, including those supported by the EU SURE mechanism, as well as the reforms and policies of the last decade.
Based on the Commission forecast, the euro area deficit is projected to continue its decline in 2022 to 3.5% of GDP but is expected to widen in 2023 to 3.7% of GDP. Deficit levels vary significantly among Member States. The number of Member States with deficits above the 3% of GDP Treaty reference value is expected to increase from 10 to 12 between 2022 and 2023 based on the Commission forecast. Public debt in the euro area is expected to decline to 92% of GDP in 2023, decreasing gradually from the 2021 level but remaining well above the pre-COVID-19-crisis level.
The euro area fiscal stance is projected to be clearly expansionary in 2022 and to be broadly neutral in 2023, according to the Commission, but would turn expansionary if additional energy support measures were to be enacted or current ones prolonged throughout 2023. Broad-based fiscal stimulus to aggregate demand in 2023 is not warranted, the focus being instead on protecting the vulnerable households and firms, while maintaining the agility to adjust to the rapidly evolving situation, if needed. We agree that fiscal policies should aim at preserving debt sustainability as well as raising the growth potential in a sustainable manner, thus also facilitating the task of monetary policy to ensure the timely return of inflation to the ECB’s 2% medium-term target.
Given the urgent need to react to the energy price and inflation shock, we have taken emergency measures that could be easily and rapidly deployed. The direct budgetary cost of the measures in 2022 is estimated at 1.3% of GDP in the euro area. Many of these measures have been broad based and focused on energy prices, instead of targeted and addressing incomes. In 2023, the cost is projected at 0.9% of GDP in the euro area, and could increase significantly, if the already announced measures were to be kept in place for the full year.
Going forward, as part of our response to mitigate the impact of high energy prices, we are working to ensure that measures are more efficient, better coordinated, while being fiscally affordable. We will in 2023 examine our measures to ensure that they are targeted and focused on vulnerable households and viable firms that are temporarily exposed. A well calibrated two-tier energy pricing model* and other schemes that achieve similar objectives, taking into account national features, could be explored. Equally, our measures should support further the reduction of energy dependence on Russia and accelerate the decarbonisation of the economy. This requires preserving the price signal to reduce energy consumption and incentivising investments in energy efficiency, futureproof energy infrastructure, including interconnections, storage and innovative renewable technologies. Given the strong spill-overs in energy markets and for the euro area economies, we will coordinate our measures to preserve the level playing field and the integrity of the single market.
The Eurogroup agrees with the Commission’s assessment that all Member States should progressively withdraw such measures as energy price pressures diminish. In this regard many of the support measures currently in place are due to expire early next year. We will continue to coordinate our fiscal policy response in relation to energy support in the euro area and will further discuss a common approach for households, including reflecting on appropriate ways to wind down support, at our upcoming meetings, building on the Commission input and experience from euro area members.
We recall that the fiscal guidance for 2023 included in the Council recommendation of 12 July 2022 differentiated between those Member States with high and low/medium debt levels, depending on their fiscal and economic situation. Member States with high debt levels should pursue a prudent fiscal policy, in particular by limiting nationally financed primary current expenditure growth. Low/medium debt Member States should aim at a neutral fiscal policy stance. According to the Commission assessment, most high debt Member States’ draft budgetary plans are in line with the fiscal guidance contained in the Council recommendation, the plan of Belgium is only partly in line, and the plan of Portugal risks being only partly in line with the Council recommendation, although we recognise the progress made on deficit and debt-reduction in Portugal. According to the Commission assessment, among the low/medium debt Member States, the draft budgetary plans of Austria, Lithuania, Germany, Estonia, Luxembourg, the Netherlands, Slovenia and Slovakia are only partly in line with the Council recommendation. The Eurogroup invites the Member States to take the necessary measures within the national budgetary process to ensure that the 2023 budget is consistent with the Council recommendations, taking into account economic circumstances. As the information on the energy support measures is a key driver of this year’s assessment, we welcome the Commission’s intention to closely monitor developments and provide an update to inform our upcoming discussions.
We welcome that public investment expenditure has been on an upward trend in the large majority of Member States, helped in part by the Recovery and Resilience Facility and we recognise the need to further expand investment expenditure in 2023 and beyond, especially to support the green and digital transition, as well as energy security, including through RePowerEU, once adopted. Moreover, we acknowledge that there is a need to accelerate fiscal-structural reforms which would strengthen potential growth, competitiveness and debt sustainability.