Euro area finance ministers are aware that one day or another, the Stability and Growth Pact, frozen in the Spring to deal with the Covid-19 pandemic in 2020, will have to be applied again.
Nevertheless, given the many economic and health uncertainties surrounding the economic recovery, “there will be no sudden stop, no policy cliff-hedge” , assured Eurogroup President Paschal Donohoe at the end of the meeting of euro area finance ministers on Friday 11 September. In his view, budgetary policy will continue to support the economy as much as necessary.
According to the Commissioner for Economy, Paolo Gentiloni, there will need to be a “supportive” fiscal stance in the euro area for the relaunch “next year”. If we miscalculate the timing of this ‘landing’ from emergency measures to a gradual return to budgetary fundamentals, “we risk damaging the economy”, he warned, with a return too soon to traditional rules being the Commission's “primary source of concern”. And to consider that the lifting of the derogation clause that froze the Pact could take place when the severe economic deterioration affecting the whole Euro area is overcome, which, in his opinion, does not mean that it should be in all the countries of the Euro area.
Citing a recession of “11.8% of GDP” in 2020 in the euro area, the former Italian Prime Minister also pointed to a current slowdown in the post-Covid-19 rebound.
Based on the latest ECB economic forecasts (see EUROPE 12557/21), the President of the monetary institute, Christine Lagarde, noted that the recovery observed in the third quarter was “uneven, incomplete and asymmetric”. The very accommodative monetary policy requires a fiscal policy that will rise to the occasion, she said. She called for “an appropriate timeframe for not removing, but phasing out emergency fiscal measures”, bearing in mind that the euro area economy will not return to pre-crisis levels before “the end of 2022”.
The French Finance Minister, Bruno Le Maire, welcomed the fact that the ministers had reached “a consensus on the need to continue supporting the economies”. Until it is known when the crisis will end or when a vaccine will be available, we have to live with Covid-19, implement national recovery plans and “not define a framework that would be too rigid”, he considered.
Over lunch, Europe's leading financial experts discussed how to strengthen the Union's sovereignty in light of experience with the pandemic. According to a European source, two visions are clearly opposed: some countries want to take advantage of the crisis to change European budgetary rules, while others advocate applying the Recovery Plan before returning to the previous regulatory situation.
Within the Eurogroup, the discussion on a gradual lifting of the emergency budgetary measures has therefore not really started. But there is a feeling that linking this discussion to the reflection on the in-depth reform of the Stability Pact is likely to take a long time.
European Recovery Plan. The finance ministers also stressed the need to move quickly to adopt the legislative texts implementing the European Recovery Plan approved by the EU27 on 21 July.
According to Mr Le Maire, the European Recovery Plan must be adopted by December at the latest in order to allow the national plans to be presented in January 2021 and the first disbursements to be made in March, after validation of the national plans at the European level. “There is not a minute to lose”, he said.
Mr Gentiloni indicated that the Commission would shortly present a Communication setting out common guidelines for the preparation of national recovery plans.
Banking Union. The Eurogroup also took stock of the obstacles hindering the completion of the Banking Union in the euro area (see EUROPE 12555/22).
Mr Donohoe expressed a common willingness to move forward, in particular through dialogue with Italy to overcome its internal difficulties regarding the reform of the European Stability Mechanism (ESM). This is the last obstacle preventing this reform, which is intended in particular to convert, before 2024, the permanent rescue fund for the euro area into a backstop for the Single Resolution Fund (SRF), the financial arm of the Banking Union's ‘resolution’ window.
Questioned by EUROPE on the margins of the informal ministerial meeting in Berlin, the Chair of the European Parliament's Committee on Economic and Monetary Affairs, Irene Tinagli, personally endorsed the Italian government's request to make parallel progress on all outstanding aspects of the Banking Union, such as the backstop for the SRF and the establishment of a European Deposit Insurance Scheme (EDIS).
According to Mr Le Maire, the reform of the treaty establishing the ESM could be completed “in November”, in order to make the backstop operational “by the end of 2021”. We have also defined a method for relaunching work on the Banking Union," he added.
Within the Eurogroup, caution over the timing dominates, although Mr Donohoe, who believes in an early introduction of the backstop for the SRF, will have to report on the progress of the Banking Union at the Euro Summit in December.
ECB. On Friday, Mr Donohoe also officially launched the procedure for the appointment of a member of the ECB's Executive Board. Member States have until 25 September to nominate a candidate. The Netherlands said they will. The selection of the candidate will take place at the Eurogroup in October. (Original version in French by Mathieu Bion and Marion Fontana)