The European Commission formally proposed on Wednesday 2 June that the general escape clause of the Stability and Growth Pact should continue to apply until the end of 2022, with EU Member States only expected to return to their pre-Covid-19 growth levels in the course of next year.
“The recovery remains uneven and uncertainty is still high, so economic policy must remain supportive in both 2021 and 2022”, said Executive Vice-President Valdis Dombrovskis. He added, “We can confirm that the general escape clause will continue to be applied in 2022 but no longer so as of 2023”.
To justify this expected announcement, the EU institution relies in particular on the spring economic forecasts according to which, after an unprecedented recession of 6.1% of GDP in the EU in 2020, the economy at the level of the EU27 should rebound to 4.2% of GDP in 2021 and 4.4% in 2022 (see EUROPE 12719/2). Earlier this year, the Eurogroup had already recommended an expansionary fiscal stance for 2021 and 2022 (see EUROPE 12678/5).
This will avoid a premature withdrawal of official aid, while encouraging a shift from emergency aid to more targeted aid that promotes economic growth.
The consequence of extending the freeze of the Pact is that no excessive deficit procedure will be opened in 2021 or 2022. Yet all EU Member States, except Denmark and Luxembourg, will have a public deficit of more than 3% of national GDP this year and 13 are expected to do so next year.
Romania is in a different situation, because it was already subject to an excessive deficit procedure before the outbreak (see EUROPE 12459/17).
Only qualitative fiscal policy recommendations
Although the freeze on fiscal rules will be maintained next year, the Commission nevertheless makes only qualitative recommendations for fiscal policy, taking into account the start of operations under the Recovery and Resilience Facility (RRF)—the budgetary instrument at the heart of the Next Generation EU Recovery Plan—from July.
For 2021, the European institution estimates that at EU level, public support to the economy will reach 7.5% of EU GDP (6.6% in 2020), of which 4.1% from national budgetary measures, 3.0% from automatic stabilisers, and 0.4% from the RRF Facility. For 2022, support will amount to 3.9% of EU GDP, of which 1.2% from budgetary measures, 2.2% from automatic stabilisers, and 0.5% from the RRF.
The Commission distinguishes between very highly indebted countries, such as Greece (public debt equivalent to 205.6% of GDP at the end of 2020), Italy (155.8%), Portugal (133.6%), Spain (120.0%), Cyprus (118.2%), France (115.7%), and Belgium (114.1%), and the others, which have less debt.
These highly indebted countries will be able to continue to support their economies through investment, in particular thanks to the RRF, but they are invited to limit budgetary spending which represents “a permanent burden” on their public finances, said the European Commissioner for Economy, Paolo Gentiloni.
Less indebted Member States will have greater flexibility in providing public support to their economies, although they are encouraged to keep control of their spending. In the medium term, however, the EU27 will have to work towards the sustainability of their public finances.
In 2022, the Commission will provide quantitative recommendations on Member States’ budgetary policies, once the uncertainties start to clear up.
On Wednesday, the EU institution updated its analysis of macroeconomic imbalances, which remains broadly unchanged since last autumn (see EUROPE 12604/1). “The main sources of imbalances remain unchanged. The pandemic weighs on existing imbalances but not to an extent that we would change our assessment”, noted Mr Dombrovskis.
Thus, nine Member States (Croatia, France, Germany, Ireland, the Netherlands, Portugal, Romania, Spain, and Sweden) with imbalances remain under surveillance, as well as three others—Cyprus, Greece, and Italy—for which excessive imbalances had been identified.
The Commission also presented several reports on macroeconomic surveillance in the euro area countries—Greece, Portugal, Ireland, Spain—that have been subject to a rescue package.
The tenth report of its kind for Greece gives a positive assessment of the reform efforts undertaken by the Greek authorities despite the difficulties related to the health situation. A senior European official described positively the introduction of a new framework for corporate insolvency, the reduction of non-performing bank loans (NPLs), the strengthening of the staff of the Greek tax collection agency, the introduction of a guaranteed minimum income in Greece, as well as reforms of the labour market and the public procurement code.
If it endorses the analysis contained in this tenth report, the Eurogroup is expected to approve on 17 June the release of a further €748 million of Greek debt relief.
More information on the socio-economic policy recommendations: https://bit.ly/3yTRGHH
An approach to employment that remains broadly unchanged
The 2021 edition of the guidelines for Member States’ employment policies have undergone only moderate changes, as stated by the European Commissioner for Jobs and Social Rights, Nicolas Schmit.
“We have not innovated too much, because last year the guidelines were very much adapted and reformed, adapted to the big challenges we are facing”, he said.
The guidelines were amended in October 2020 to take into account the consequences of the pandemic crisis, but also the objectives related to the dual green and digital transition, as well as those of the United Nations sustainable development goals.
Among the most notable changes in the 2021 edition are the recitals of the guidelines which have been updated to incorporate the conclusions of the Porto Social Summit (see EUROPE 12716/3), referring to the European pillar of social rights as a fundamental element of economic recovery in the EU and emphasising that the social dimension has always been at the heart of the European social market economy.
In addition, the recitals also refer to the EU’s new headline targets for employment, skills development and poverty reduction by 2030, which are set out in the Action Plan for the European pillar of social rights (see EUROPE 12697/22). Finally, they take into account the Commission’s recommendation on active and effective employment support (EASE).
The impact of the pandemic on employment has remained limited overall, Mr Schmit noted. The unemployment rate in the EU was 7.3% in March, compared with 7.2% in March 2020. This is due in particular to the massive use of short-time working supported by the SURE instrument at European level. However, this slight increase in unemployment was mainly at the expense of young people.
The guidelines are now to be discussed in the EU Council, with a view to adoption at the Employment and Social Policy Council (EPSCO) in October.
To consult the 2021 employment guidelines: https://bit.ly/34HtMkN (Original version in French by Mathieu Bion and Pascal Hansens)