The European Commission believes that the economic recovery is still fragile because of the continuing uncertainties linked to the Covid-19 pandemic, and so, on Wednesday 3 March proposed extending the freezing of the Stability and Growth Pact in the European Union until the end of 2022.
Valdis Dombrovskis, Executive Vice-President of the Commission, said that the decision, which will be taken in the spring, will depend on “ quantitative criteria”, “the key element” being the time until the level of business activity returns to pre-crisis levels. He added: “Based on our winter economic forecasts, EU GDP should return to its 2019 level towards the middle of 2022. On this basis, the general escape clause [of the Pact] will remain active in 2022, but not in 2023”.
With the support of the Member States (see EUROPE 12452/1), the Commission activated this general escape clause in March 2020, for the first time since the EU’s fiscal rules were written.
In response to a question from EUROPE, Dombrovskis noted that this decision was based on an in-depth assessment of the consequences of the pandemic, which showed a “severe economic downturn” within the euro area. The same reasoning will be used to decide whether to continue to freeze the Pact.
Paolo Gentiloni, the European Commissioner for the Economy, said: “We don’t have a set of rules on this matter”. He considered the communication adopted by the Commission on 3 March as “an initial attempt to determine the criteria”. A key criterion is to “return to pre-crisis GDP” and to include the criterion in an overall assessment of the macroeconomic situation, he said.
He also stated that the proposal to continue to freeze EU fiscal rules is “not related” to the parliamentary elections in Germany next September or the presidential elections in France in spring 2022.
Any decision on the general escape clause in the Stability Pact will be made at the end of the first half of the year following a debate with Member States and will be based on updated data that the Commission will present in May.
The Commission’s communication, which was announced at the last Eurogroup meeting (see EUROPE 12658/2), also lays the groundwork for the EU’s budgetary policy during the pandemic and for providing guidance to Member States, which, by the end of April, will have to submit their national stability programmes for 2021 and their recovery plans, as part of the Next Generation EU recovery plan.
We must provide Member States with “predictability”, says Gentiloni.
“Fiscal policies need to remain supportive this year and next. Support needs to continue as long as needed and we should avoid its premature withdrawal”, said Dombrovskis. “The risk of doing too little is greater than the risk of not doing enough”, added Gentiloni.
As the recovery gradually takes shape, “temporary and targeted” emergency fiscal measures will have to give way in 2022 to “differentiated” support for an economic recovery that is conducive to the environmental and digital transitions, said Dombrovskis. The Member States are therefore invited to make use of the financial windfall from the EU’s recovery plan.
And, once the health and economic emergency has passed, national public finances will need to return to a sustainable medium-term path. “We should take a close look at the make-up and quality of public finances”, said the Commission Vice President. He stated that heavily indebted countries will again need to be cautious and take advantage of the subsidy component of Next Generation EU.
The debate on reforming the Pact will then be relaunched
Once economic recovery is sufficiently established in the EU, the Commission plans to relaunch the debate on reforming the EU’s economic governance framework.
We have “no preconceived ideas” on this relaunched project and, of course, we will incorporate the lessons learned during this exceptional situation to assess the relevance of the Stability Pact, said Dombrovskis. Echoing a number of reports from the European Fiscal Board (see EUROPE 12585/22, 12360/5), he mentioned the possibility of simplifying European fiscal rules, which have become “too complex and difficult to measure”.
However, it is not clear at this stage whether reform of the EU’s fiscal rules will come quickly enough to ensure that the frozen rules, which seem outdated in the current situation, do not apply again without being modified.
According to the Commission, emergency budgetary measures adopted by member countries to cushion the economic impact of the pandemic have averted an additional 4.5% fall into recession for the EU’s GDP. Cumulatively, these measures - expenditure, public guarantees - are equivalent to 4% of GDP, 3.3% of which is discretionary expenditure (0.6% for the health sector and 2.7% for other economic sectors affected).
The Commission communication can be found at: https://bit.ly/3e3Yafb (Original version in French by Mathieu Bion)