EU Finance Ministers and heads of central banks will discuss the fiscal and budgetary conditions for an optimal economic recovery that is conducive to the green and digital transitions on Friday 21 and Saturday 22 May in Lisbon, at their first face-to-face meeting since September 2020 in Berlin.
At lunchtime on Friday, their discussions, which will be moderated by OECD Chief Economist Laurence Boone, will focus on economic and fiscal policies.
In its spring forecasts, the European Commission expects a stronger-than-expected economic rebound (+4.3% of GDP) in 2021 on the back of a surge in vaccination campaigns against Covid-19 (see EUROPE 12719/2). But the continuing uncertainties associated with the pandemic call for caution.
Like the Eurogroup (see EUROPE 12722/21), the message from the Ecofin Council should be not to abruptly remove public support measures for the economy.
The derogation clause of the Stability and Growth Pact should remain frozen until the European economies have returned to their pre-crisis level, probably until the end of 2022.
However, the question will be how the budgetary measures will evolve, from all-out emergency support to more targeted aid for the sectors of activity that have suffered most from the pandemic. Another question is how to prevent public support from artificially keeping non-viable ‘zombie’ companies alive.
Joined by the governors of the national central banks, the ministers will discuss, on Friday afternoon, how to strengthen the complementarity of fiscal and monetary policies in order to face the challenges ahead, while the European Recovery Plan Next Generation EU has yet to produce its first effects, which are expected in the summer.
In a preparatory document for the discussions, of which EUROPE has obtained a copy, the Portuguese Presidency of the EU Council mentions for example the “crucial challenge of managing a high level of public debt”. It added that “tensions between the need to support the recovery and to ensure sustainable public finances may re-emerge”, especially if market interest rates rise.
The EU’s top financiers should also “discuss the transitory nature or not of the slight upturn in inflation” observed at the beginning of the year, a national diplomatic source said on Thursday 20 May. According to them, “monetary policy should remain accommodative until at least mid-2022”.
The Commission forecasts that inflation will rise to 1.7% in 2021 and then fall back to 1.3% in 2022 in the euro area.
At the end of April, the ECB decided to maintain its accelerated pace of massive sovereign bond purchases under the ‘PEPP’ operation launched at the outbreak of the pandemic (see EUROPE 12704/8).
Environmental taxation. On Saturday morning, ministers and central bankers will discuss a European strategy for using environmental taxation to achieve the EU’s goal of becoming climate neutral by 2050.
“The future of environmental taxation is an important discussion in the run-up to the publication of the ‘Fit for 55’ legislative package”, the source said.
The Commission is expected to unveil its proposals on 14 July.
In a second document used as a basis for discussion, the Portuguese Presidency cites the revision of the Energy Tax Directive, in place since 2003, to increase the tax burden on raw materials and polluting activities (see EUROPE 12702/20). It also mentions the future Carbon Border Adjustment Mechanism (CBAM) at the EU’s borders to avoid carbon leakage and encourage non-Member States to act in favour of the ecological transition (see EUROPE 12685/19). In addition, other taxes, such as VAT, could stimulate the production and consumption of low-carbon fuels (biogas, green hydrogen).
“All the while, governments should carefully monitor and mitigate potential regressive effects and ensure social sustainability of tax measures related to green transition”, the Portuguese Presidency stresses.
A veiled reference to social movements protesting against carbon taxes imposed from above on the population, such as the ‘yellow vests movement’ in France. (Original version in French by Mathieu Bion with Camille-Cerise Gessant)