The European Fiscal Board is not convinced of the need to extend the activation of the general escape clause of the Stability and Growth Pact until the end of 2023, as suggested by the European Commission at the end of May due to the uncertainty caused by the Russian invasion of Ukraine (see EUROPE 12958/1).
Indeed, the experts believe that the economic circumstances that allowed for fiscal rules to be frozen during the outbreak of the Covid-19 pandemic in the European Union are no longer present: economic growth is anchored in the medium term, albeit at a lower pace than expected at the end of 2021 due to the war in Ukraine, and GDP in the euro area will exceed its pre-pandemic level in 2022.
“Not all Member States are convinced of this proposal, but the EU Council is likely to go along with it”, says Niels Thygesen, Chair of the European Fiscal Board, in the report that the body released on Wednesday 22 June.
Continuing to provide qualitative budgetary guidance without setting quantitative targets will affect Member States’ fiscal policies at a time when the macroeconomic situation remains volatile due to soaring inflation and higher financing conditions, he said.
In particular, the European Fiscal Board believes that this will prevent the appropriate budgetary stance for 2023, which it says should be “moderately restrictive”, from being achieved. Maintaining an expansionary fiscal stance would be counterproductive by complicating the ECB’s task of keeping price increases under control through its inflationary effect. Moreover, the European Fiscal Board adds, even with a restrictive budgetary stance, the level of budgetary support would remain “ significant” while being more targeted towards sectors of activity in difficulty and vulnerable social categories.
Keeping the Pact frozen will also take pressure off Member States in the reflection on the reform of the European governance framework, in Mr Thygesen’s view. The Commission, which had promised to make concrete proposals well in advance of 2023, has indicated that it will make proposals after the summer.
Welcoming the success of the Pact’s escape clause to deal with extraordinary circumstances at the height of the pandemic, the Chair of the European Fiscal Board concludes that the time has come to “contain the long-term trend of public expenditure rising faster than public revenue and prepare for future crises”.
The Eurogroup is expected to set out its budgetary priorities ahead of the preparation of national draft budget plans for 2023 on Monday 11 July.
See the European Fiscal Board’s report: https://aeur.eu/f/29O (Original version in French by Mathieu Bion)