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The Covid-19 pandemic and the Russian invasion of Ukraine led to very significant deteriorations of public finances in the euro area. Macroeconomic conditions and monetary policy have been normalising rapidly, and this column argues that fiscal policy normalisation should proceed more rapidly than currently envisaged and the economic good times be used to build fiscal buffers. This would also help the ECB in bringing inflation back to its target, while putting EU member states in a position to deal with the rising costs of ageing and climate change, as well as new challenges such as rising interest payments and costs of defence.
The Covid-19 pandemic and the Russian invasion of Ukraine led to very significant deteriorations of public finances in the euro area. While macroeconomic conditions and monetary policy have been normalising rapidly, fiscal policy is lagging. Many governments took advantage of the liberal interpretation of the severe economic downturn clause in the Stability and Growth Pact (SGP) to maintain unwarranted fiscal stimulus. As risks to the macroeconomic outlook remain high, rebuilding fiscal buffers when conditions allow is vital. In this column, based on the European Fiscal Board’s (EFB) assessment of the fiscal stance appropriate for 2024, we argue that fiscal policy normalisation should proceed more rapidly than currently envisaged.
In many ways, 2024 is likely to mark the return to normality in the way the fiscal rules are implemented. The severe economic downturn clause of the SGP (popularly known as the ‘general escape clause’), has been applied for three consecutive years – well beyond the criteria of a return to pre-pandemic real economic activity that was put forward by the Commission back in 2020 – but the clause will no longer apply to 2024. Thus, on 24 May 2023, the European Commission issued specific quantitative fiscal guidance to governments for their 2024 national budgetary plans, and it signalled its willingness to open excessive deficit procedures (EDPs) in 2024 based on outturn data for the preceding year. 1 ...
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