The European Commission launched, on Wednesday 24 November, the 2022 European Semester cycle of economic policy coordination, in a context marked by a solid economic recovery, despite several uncertainties such as the impact of the Covid-19 pandemic.
Based on the autumn economic forecasts, which anticipate 5% GDP growth in the euro area and the European Union (see EUROPE 12831/17), the ‘European Semester’ fiscal package sets out the European Commission’s broad socio-economic guidelines: maintaining a moderately expansionary fiscal stance in 2022, boosting public investment in favour of the ecological and digital transitions by making the most of the Next Generation EU Recovery Plan, and better preparing for future macroeconomic shocks.
The economy is rebounding thanks to a recovery in consumption, but “we are not out of the woods yet “, said the EU institution’s Executive Vice-President, Valdis Dombrovskis, citing the spread of the Covid-19 virus as a “downside risk”. The Commissioner for Economy, Paolo Gentiloni, reported growing “headwinds” that call for increased “vigilance”. But, in his view, any new health restrictions will not lead to a situation comparable to the one experienced in the spring of 2020.
In order to create synergies and avoid duplication, the Recovery and Resilience Facility (RRF), the budgetary instrument at the heart of the Next Generation EU, has been integrated into the ‘European Semester’ process.
The European Recovery Plan facilitates the transition from fiscal measures needed to tackle the health and economic emergency to measures that stimulate long-term growth. The public subsidies it provides make a significant contribution to maintaining public investment, with a share of over 1% in four EU countries, without worsening their public finances. In this respect, the Commission welcomes the fact that, in contrast to the financial crisis of 2008, public investment will be higher in 2022 than before the pandemic.
See the Annual Sustainable Growth Survey for 2022: https://bit.ly/3DSOWN4
Recommendation for the euro area. At the level of the euro area, the fiscal stance should remain expansionary in 2022 (1.0% of GDP), albeit at a moderate level compared to 2021 (1.75%), the EU institution recommends in its draft specific recommendations to the nineteen countries that have adopted the single currency.
“Moderately supportive does not mean tightening but targeting the support” for the economy, Mr Gentiloni said. He referred to the “challenge” of gradually reducing the debt - expected to reach 100% of GDP in 2021 and 97% in 2022 - to put public finances on a sustainable path in the medium term without undermining growth.
See the draft recommendation: https://bit.ly/3reFhN0
2022 Draft Budgetary Plans. When the pandemic broke out, the European fiscal rules were de facto frozen in order to deal with the emergency. This situation, which will continue until the end of 2022, is taken into account in the analysis of the 2022 Draft Budgetary Plans that the eurozone countries (except Portugal) sent to the Commission in mid-October. On Wednesday, the Commission issued only qualitative guidelines on national budgetary trajectories.
In spring 2022, the EU institution will make country-specific recommendations for the presentation of the 2023 Draft Budgetary Plans the following autumn.
Mr Gentiloni made “positive” comments on the eighteen national Draft Budgetary Plans assessed: - maintaining nationally funded investment; - the use of the RRF by highly indebted countries to support growth; - the maintenance of an expansionary policy by countries with low or moderate indebtedness.
Nevertheless, Mr Gentiloni called for a cautious execution of the budget in order to limit the growth of expenditure, especially in countries where, as in Italy, this situation is combined with a high level of public debt.
Italian budgetary spending is expected to be above the required level of “1.5% of GDP”: this is “a rather significant amount”, an EU official said, citing “pensions” as one element of overspending.
" In the case of Italy - and to a lesser extent for Latvia and Lithuania - we would sound a note of caution over the rapid growth in national current spending. Moreover, given their high level of debt, it is important that Belgium, France, Greece, Italy and Spain maintain sustainable public finances”, Mr Dombrovskis added.
However, given the freezing of the Stability and Growth Pact, no eurozone country will have to change its 2022 Draft Budgetary Plan.
More information on the national 2022 Draft Budgetary Plans: https://bit.ly/3CQ2MOT
Procedures for macroeconomic imbalances. A report on macroeconomic imbalances in the EU, presented on Wednesday, concludes that in-depth reviews are warranted for 12 Member States: Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Spain and Sweden. Within this group, Cyprus, Greece and Italy have excessive imbalances.
“We saw a rise in public and private debt, a surge in housing prices and the reappearance of bottlenecks in the labour market”, observed Mr Dombrovskis, who said that the pandemic has halted the unwinding of macroeconomic imbalances.
See the report on macroeconomic imbalances: https://bit.ly/3l7WR1v
Implement active employment policies. According to the Joint Employment Report 2022, published on the same day, the EU labour market has held up well, despite the socio-economic turmoil caused by the pandemic.
This has been made possible to a very large extent by active policies at national and European level and, in particular, the SURE instrument (see EUROPE 12490/10) and the REACT-EU initiative (see EUROPE 12623/16), which have provided massive support to short-time work schemes.
However, the Commission is concerned that the share of employees and companies supported by these schemes is gradually decreasing.
For the EU institution, however, this is premature. On the contrary, “it is essential that Member States implement active labour market policies straight away”, stressed the European Commissioner for Jobs and Social Rights, Nicolas Schmit.
There are many challenges, starting with the shortage of labour, particularly in the construction sector, health care, long-term care, but also in the IT sector. And despite the recovery, employment and total hours worked have not yet returned to the levels seen at the end of 2019, the institution says.
The institution is therefore insisting on the implementation of its EASE recommendation on effective active support for employment, presented earlier this year in the margins of the Action Plan implementing the European pillar of social rights (see EUROPE 12671/3).
After reaching 71.6% in the second quarter of 2020, the employment rate recovered to 72.8% in the second quarter of 2021. The unemployment rate was 6.7% in September 2021 (one point lower than a year ago). With 17.4% of young Europeans in the second quarter of 2021, the youth unemployment rate remains particularly high.
For the executive summary (1) and the full report (2) : (1) https://bit.ly/3CSL6C6 ; (2) https://bit.ly/3cLIThm
Greece. In its twelfth enhanced surveillance report for Greece, the Commission gives a positive assessment of Greek reform efforts (privatisation, competition in the electricity market).
It is of the opinion that the report can serve as a basis for a decision by the Eurogroup to grant further debt service relief to Greece of up to €767 million.
See the report: https://bit.ly/3oXhtKZ
Romania. Finally, the Commission recommends that Romania take further action to correct its excessive deficit, which is the subject of a formal procedure. However, it has not taken any new measures vis-à-vis Bucharest (see EUROPE 1459/17). (Original version in French by Mathieu Bion and Pascal Hansens)