On Tuesday 22 November, the European Commission kicked off the 2023 edition of the ‘European Semester’ budgetary process, which defines the broad socio-economic policy guidelines for next year in the European Union, against a background of a sharp slowdown in growth (0.3% in 2023 compared to 3.2% in 2022 in the euro area - see EUROPE 13062/28), strong inflationary pressures caused by Russia’s armed aggression against Ukraine.
In its Annual Sustainable Growth Survey, the EU institution stresses the importance of coordinated responses to mitigate the negative impact of the energy crisis in the short term and to keep investment in the climate and digital transitions at a high level. According to the Commission, the four priorities identified in previous annual exercises remain: - promoting environmental sustainability; - boosting productivity; - ensuring macroeconomic stability and social justice.
This year, the contribution of the Next Generation EU Recovery Plan is taken into account, with over €135 billion having been made at this stage. And an Interinstitutional Agreement before the end of 2022 on the introduction of ‘REPowerEU’ chapters in the national recovery plans will provide additional means to accelerate the energy transition and reduce the EU’s dependence on Russian hydrocarbons.
See the Annual Sustainable Growth Survey: https://aeur.eu/f/46p
Euro area. The Commission also presented a draft recommendation for a broadly neutral fiscal stance for the euro area in 2023.
“Now is not the time to provide further fiscal support. That would fuel inflation and create more risk in high-debt countries”, confirmed its vice-president, Valdis Dombrovskis.
Unlike in previous years, “there is no case for an aggregate supportive fiscal stance in the face of inflationary pressures”, an EU official confirmed on Tuesday morning. In 2022, the euro area fiscal stance was strongly expansionary at 2.25% of GDP, mainly due to public support for the energy crisis, the official noted, while for 2023, the stance should be broadly neutral, provided that emergency public support to address energy prices fades during the year.
On the issue of wages, the European institution promotes a balance between the need to avoid losses of purchasing power for workers and excessive increases that would add to inflationary pressures (second round effects). But it is careful not to state target figures.
According to a second EU official, the impact on competitiveness would be less, if low wages increase in line with inflation.
See the recommendation for the euro area: https://aeur.eu/f/46q
DBPs 2023. On Tuesday, the Commission also analysed the draft budgetary plans for 2023 of 17 countries in the area (all except Italy and Latvia) plus Croatia, which will formally adopt the single currency on 1 January, in the light of the Eurogroup’s July declaration (see EUROPE 12990/15). Its recommendations are only qualitative, as the general escape clause of the Stability and Growth Pact will remain active until the end of next year.
“Overall, we see that investments is keeping up and that budgets are prudent - which is good news. There are a few countries where current expenditure is growing too fast. Among countries with high debt, this is clearly the case for Belgium. We also see some risk for Portugal”, Mr Dombrovskis said.
The countries concerned are divided into two groups. Those with medium or low public debt are encouraged to adopt an overall neutral policy stance. High-debt Member States (Belgium, Portugal, Italy, France, Spain, Greece) should pursue a prudent fiscal policy by keeping current expenditure growth below potential national GDP growth in the medium term.
According to their draft report, Belgium and Portugal and, for the low-debt countries, Austria, Lithuania, Germany, Estonia, Luxembourg, the Netherlands, Slovenia and Slovakia should pursue expansionary fiscal policies. They are invited to take steps to comply fully with these recommendations. However, no quantitative target is set for 2023 due to the ‘freezing’ of the Pact.
The Commission reiterates the importance of targeting and keeping temporary emergency measures on vulnerable people and businesses most affected by soaring energy prices. It states that these measures should also encourage households and economic operators to reduce their consumption.
However, according to the first European official, “70%” of the aid put in place by the States is transversal. It has even identified “a budgetary risk” that would arise from maintaining these measures throughout 2023, increasing their aggregate cost from 0.9% (current estimate) to 2% of GDP (estimate for the whole year 2023).
According to Mr Dombrovskis, Member States should “urgently” improve the quality of these measures, which are also intended to reduce consumption. The Commission endorses the ECB’s idea of a two-tier model to subsidise energy prices up to a certain level of consumption, above which market prices would apply.
More information on the draft budgetary plans of the euro area countries: https://aeur.eu/f/46r
Greece. The Commission has published the post-bailout monitoring reports for the euro area countries (Greece, Ireland, Portugal, Cyprus, Spain) that were under financial supervision. It gives credit to these countries for maintaining their ability to repay their public debt since regaining fiscal autonomy.
For Greece (see EUROPE 13004/14), the Commission suggests a final debt service relief of around €6 billion. An amount of € 644 million will correspond to repayments to Athens of profits made by the European System of Central Banks on the holding of Greek debt (SMP/ANFA operations). An amount of € 5.2 billion would correspond to the definitive removal of the ‘step-up’ margin applied to loans granted in 2012 and to be repaid over the next 40 years.
More information on the post-programme surveillance report for Greece: https://aeur.eu/f/46s
Macroeconomic imbalances. On Tuesday, the European Commission also took stock of the macroeconomic imbalances in many Member States.
Its new Alert Mechanism Report concludes that in-depth reviews are warranted for seventeen Member States, namely Cyprus, France, Germany, Greece, Italy, the Netherlands, Portugal, Romania, Spain and Sweden (countries already subject to surveillance), as well as the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Luxembourg and Slovakia (countries concerned for the first time).
In 2023, three thematic analyses on the existence of macroeconomic imbalances will be carried out in the following areas: house prices (Czech Republic, Estonia, Germany, Hungary, Latvia, Lithuania, Netherlands, Portugal, Slovakia, Sweden), competitiveness and external imbalances.
See the Alert Mechanism Report on macroeconomic imbalances: https://aeur.eu/f/46t
Employment. On Tuesday, the Commission finally presented its Joint Employment Report, which for the first time takes into account the national targets set by Member States to implement the social objectives adopted at the Porto Summit in May 2021 (see EUROPE 12716/3).
This joint report, which will be submitted to the ‘Employment’ Council on 8 December, confirms that the EU labour market has fully recovered from the Covid-19 pandemic, with current employment levels exceeding the pre-pandemic level since the third quarter of 2021.
Nevertheless, we must remain “vigilant” on a number of aspects, warned the European Commissioner for Jobs and Social Rights, Nicolas Schmit.
Young people, women and vulnerable groups, such as people with disabilities or with a migrant background, need extra support to enter the labour market, the report says.
And there are real risks of labour shortages in some sectors, such as health care and long-term care, the software sector, construction or the engineering trades. Shortages of skilled workers have also been observed in some sectors related to the ‘green’ transition. The report also points to a real delay in updating digital skills.
In addition, the rise in prices since 2021, especially energy prices, accelerated by Russia’s war of aggression against Ukraine, has also put pressure on the EU economy and households and poses a risk to labour markets, warned Nicolas Schmit. If minimum wages have risen, they have not risen fast enough in relation to inflation, he also said.
Many workers are not protected by adequate minimum wages in the EU, the report also notes. Overall, almost one in ten workers is at risk of poverty.
Furthermore, minimum wages have decreased in real terms in almost all Member States. Hence the importance, according to the Commission, of mitigating the impact of inflation on low wage earners, who are the most affected by rising energy and electricity prices.
See the Joint Employment Report: https://aeur.eu/f/46w (Original version in French by Mathieu Bion and Solenn Paulic)