The European Fiscal Board believes that an expansionary fiscal stance at the euro area level for 2022 is “appropriate” given the uncertainties related to the evolution of the Covid-19 pandemic, in a report published on Wednesday 16 June (EUROPE 12678/5).
This is made possible by the persistence of excessive public deficits with no regulatory consequences for euro area countries combined with the ramping up of funding via the Next Generation EU Recovery Plan.
However, “the challenge to economic recovery requires more than an aggregate level of fiscal support,” he stresses. It emphasises the “composition” of budgetary spending, which should gradually shift, as the economy recovers, from emergency aid to growth-enhancing spending targeted at the sectors that have suffered most from the pandemic.
At the beginning of June, the European Commission recommended continuing to activate the general escape clause of the Stability and Growth Pact until the end of 2023 (EUROPE 12732/1).
Presenting the Board’s report, its chairman, Niels Thygesen, expected that wealth creation in the euro area would return to pre-crisis levels by 2022. There are significant differences between Member States, he noted, with Italy the least well placed to achieve this.
Asked about the reform of the European budgetary rules, Mr Thygesen advocated a resumption of reflection in the autumn in order to arrive at clear guidelines, or even the adoption of new rules, as soon as the Pact’s derogation clause was deactivated.
Managing the high levels of public debt, swollen by the costs of dealing with the pandemic, will need to be a key element of this reform.
It will be necessary to “define a satisfactory pace of debt adjustment” that is “effective, implementable and credible” in the eyes of the markets, the chairman of the Board said. This pace of adjustment, which would be differentiated by country, would amount to setting an annual expenditure level based on the observed level of debt.
Within the euro area, seven countries had a public debt level above 100% of GDP at the end of 2020: Greece (205.6%), Italy (155.8%), Portugal (133.6%), Spain (120%), Cyprus (118.2%), France (115.7%) and Belgium (114.1%).
In this debate, some experts attach more importance to the analysis of the sustainability of debt over time than to the absolute level of debt. They point to the fact that governments have increased the maturity of maturing debt and that current low interest rates reduce debt service. It remains to be seen how long these rates will remain advantageous for.
See the report of the European Committee: https://bit.ly/3gTc6IX (Original version in French by Mathieu Bion)