Faced with the economic uncertainty for the European Union caused by the Russian invasion of Ukraine, the European Commission recommended, on Monday 23 May, that the general escape clause of the Stability and Growth Pact, in place since the spring of 2020 at the time of the outbreak of the Covid-19 pandemic (see EUROPE 12452/1), is maintained until the end of 2023.
“We are facing heightened uncertainty and strong downside risks to the outlook, so we propose maintaining the general escape clause in 2023, and deactivating it as of 2024”, said the EU institution’s Vice-President, Valdis Dombrovskis, presenting the socio-economic policy recommendations by EU countries as part of the ‘European Semester’ budget process. He went on to warn that: “This does not mean a ‘free for all’. Since growth remains positive and inflation is high, a broad-based fiscal impulse to the economy in 2023 does not appear to be warranted”.
Last week, the Commission significantly revised downwards its growth forecasts for both the euro area and the EU, from 4.0 to 2.7% of GDP for both geographical areas in 2022 compared to the winter economic forecasts presented in February before the outbreak of war in Ukraine (see EUROPE 12953/20). And it forecasts record inflation at 6.1% in 2022.
In the same vein, the EU Commissioner for Economy, Paolo Gentiloni, said that extending the general escape clause of the Stability Pact will “provide the space” for Member States’ national fiscal policies to react quickly to evolving circumstances. But “we are not proposing a return to unlimited spending”, he warned.
In its country-specific socio-economic policy recommendations, the Commission advocates fiscal prudence. It continues to differentiate between highly indebted countries, which should not increase their public spending faster than their medium-term potential growth level, and low or moderately indebted countries whose spending should allow them to achieve a broadly neutral fiscal stance.
For the most indebted countries, the Commission provides figures on whether they exceed the recommended threshold. For example, for Italy, it observes a large surplus fiscal stance of 1.3% of national GDP in 2022 and is of the opinion that the Italian authorities are not sufficiently restraining public expenditure growth. For France, the budgetary surplus is expected to reach 1.6% of national GDP this year, a level of public expenditure that would not be fully compensated.
In the autumn, the Commission will reassess the budgetary situation in the light of the latest macroeconomic developments and the draft budget plans for 2023 presented by the euro area countries in mid-October. At that time, it will decide whether to open new excessive deficit procedures, a procedure that currently only concerns Romania.
As for the reflection on the future of the Pact, it was also decided to postpone until after the summer the presentation by the Commission of guidelines on a reform of the medium-term fiscal rules on the basis of the reflection relaunched at the end of 2021, but once again disrupted by the urgency of the EU’s response to the Russian invasion (see EUROPE 12829/3).
“We need more time to identify a landing zone for this review” of the fiscal rules, Mr Dombrovskis confirmed.
See the Communication on the Commission’s ‘European Semester’ Spring Package: https://aeur.eu/f/1s0
See the country specific recommendations: https://aeur.eu/f/1s2
See the review of the German and Portuguese 2022 draft budgetary plans: https://aeur.eu/f/1s7
Macroeconomic imbalances. In the ‘European Semester’ package, the EU institution takes stock of macroeconomic imbalances in twelve Member States (see EUROPE 12839/1).
Seven Member States - Germany, Spain, France, the Netherlands, Portugal, Romania and Sweden - still have imbalances, while three others - Cyprus, Greece and Italy - have imbalances that are considered excessive.
In contrast, Croatia and Ireland no longer have macroeconomic imbalances, as their public and private debt levels have fallen sharply, the Commission says.
“This sends an important signal ahead of (Croatia’s) convergence report” on the road to euro membership, which we will present “on 1 June”, noted Mr Dombrovskis. Croatia hopes to join the euro area on 1 January 2023 (see EUROPE 12408/6), while Bulgaria’s accession will not take place until 2024.
See the reports on macroeconomic imbalances: https://aeur.eu/f/1s5
Updated employment guidelines. On Monday, the European Commission also presented guidelines for Member States’ employment policies in 2022.
In particular, it proposes to update these guidelines with a focus on the post-Covid-19 environment, the need to make the green and digital transitions socially equitable, and the impact of recent war-related initiatives in Ukraine, such as measures to provide access to the labour market for refugees fleeing the war.
The guidelines also aim to support vulnerable households in the face of rising energy prices and living costs, to address labour shortages and skills mismatches through skills and learning policies, and to meet the EU’s employment, skills and poverty targets, as agreed at the Porto Summit in May 2021.
On access to work for Ukrainian refugees, the guidelines state that “Member States should involve the social partners in the design, implementation and evaluation of appropriate policy measures”, such as the recognition of qualifications (see EUROPE 12927/3).
The Commission also calls for “a coherent set of active labour market policies, including temporary and transitional hiring incentives, skills policies and improved employment services, needed to support labour market transitions, also in the light of the green and digital transformations”.
See the employment guidelines: https://aeur.eu/f/1s8
Sustainable development. The country reports on the implementation of the 17 UN Sustainable Development Goals (SDGs), now integrated into the ‘European Semester’ process, take stock of progress on the basis of Eurostat’s third monitoring report published the same day (see EUROPE 12953/12).
“While progress has been observed with regard to most SDGs, there are of course areas where more needs to be done (and) this includes combatting climate change and its impacts”, commented Paolo Gentiloni.
There is a slight trend away from the targets for clean water and sanitation (SDG 6) - for which data was missing in 2020 (see EUROPE 12741/9) - and life on land (SDG 15), with continued pressures on ecosystems and biodiversity. While the EU’s forest area and protected land areas have increased slightly, the pressure on biodiversity has continued to grow.
The overall assessment of the EU’s progress on SDG 6 and global partnerships (SDG 17) is neutral. This means that an almost equal number of sustainable and unsustainable developments have been recorded.
Progress on good health and well-being (SDG 3), life below water (SDG 14), gender equality (SDG 5), sustainable cities and communities (SDG 11), reduced inequality (SDG 10), responsible consumption and production (SDG 12), quality education (SDG 4), climate action (SDG 13) and ‘zero hunger’ (SDG 2) has been moderate.
For SDG 7 (‘Affordable and Clean Energy’), the overall positive assessment should be put into perspective, because while the share of renewable energy has been growing steadily to reach 22.1% of gross final energy consumption, fossil fuel imports still cover more than 50% of demand.
Similarly, progress on SDG 8 on the economy and labour market has been positively influenced by economic growth and labour market performance in 2021 (latest data available).
According to the Commission, the support provided under the Next Generation EU recovery plan underpins a significant number of reforms and investments that should help Member States make further progress towards the SDGs.
See the Eurostat report: https://aeur.eu/f/1s9 (Original version in French by Mathieu Bion with Solenn Paulic and Aminata Niang)