Tuesday, July 5

Brussels bets on extending the suspension of fiscal rules with the misgivings of Germany and the Netherlands

Brussels is committed to extending for another year, until 2024, the suspension of the European fiscal rules that govern the deficit and debt limits, as well as the path to cut them. But it does so without the enthusiasm of the past, calling for “prudence in its application, especially in countries with higher levels of debt”, according to the European Commissioner for the Economy, Paolo Gentiloni, after the Eurogroup meeting in Brussels. But, also, it is a decision that does not finish convincing Germany and the Netherlands and that the 27 will adopt, foreseeably, in the Ecofin meeting (finance ministers of the EU next month).

Thus, the Finance Ministers Christian Lindner and Sigrid Kaag, respectively, have expressed doubts on Monday about the extension of the escape clause. Upon his arrival at the Eurogroup, the German, Lindner, stressed that the priority should be “the fight against inflation” and added that “even if the general escape clause is extended (which freezes the limits on the debt and deficit of countries), this “does not mean that this option has to be used. The priority is to fight inflation and for that we have to abandon the expansionary fiscal policy so that the European Central Bank (ECB) has room to fight inflation with its own tools“.

Lindner said that his government “takes note” of the proposal and added that he would prefer to return “as soon as possible” to the Stability Pact and warned that his country will activate a “constitutional debt brake” in 2023.

The Dutch Sigrid Kaag, for her part, assured that her country is “open” to the Brussels proposal, and that it will “carefully weigh it”. But he added: “The ability to spend more doesn’t mean you should. It is necessary to undertake a reduction of the debt in a clear and transparent way”.

Gentiloni has insisted that the EU “is far from economic normality”, and that he is not proposing “a return to spending without limits”.

“Spain has been supporting a review of the fiscal rules before they are fully reactivated”, said the economic vice president, Nadia Calviño: “I think it is positive that this general escape clause is extended for another year, because it would not be understood that in a moment of such high uncertainty as the one we find ourselves in, some rules that have to be revised to adapt to the present needs and, above all, to the future investment needs of the European Union, be reapplied as they are. What the European Commission does is make a general recommendation of fiscal prudence that is absolutely aligned with the path of reducing the deficit and the public debt that our country has proposed”.

In this sense, in relation to the revision of the regulations, Calviño has stated: “I hope that the sooner the European Commission puts a proposal on the table and that it does so with enough time so that we have that necessary debate to be able to adapt the rules before those fiscal rules that in our opinion do not respond to the current or future needs of the European Union are eliminated as is or recovered as is”.

“The activation of the general escape clause of the Stability and Growth Pact in March 2020 allowed Member States to react quickly and adopt emergency measures to mitigate the economic and social impact of the pandemic. Coordinated budgetary action cushioned the economic blow and paved the way for a strong recovery in 2021.

Brussels further states: “Policies to mitigate the impact of rising energy prices and support those fleeing Russia’s military aggression against Ukraine will contribute to an expansionary fiscal policy in 2022 for the EU as a whole.”

“The specific nature of the macroeconomic shock caused by the Russian invasion of Ukraine, as well as its long-term implications for the EU’s energy security needs, call for careful design of fiscal policy in 2023,” it continues: fiscal must expand public investment for the green and digital transitions, as well as energy security. Full and timely implementation of recovery and resilience plans is key to achieving higher levels of investment. Fiscal policy must be prudent in 2023, controlling the growth of domestically financed primary current spending, while allowing automatic stabilizers to work and providing temporary and targeted measures to mitigate the impact of the energy crisis and provide humanitarian assistance to people fleeing Russia’s invasion of Ukraine.

Brussels insists that “fiscal plans for the coming year must be based on prudent medium-term adjustment paths that reflect the fiscal sustainability challenges associated with high levels of debt relative to GDP, which have increased further due to the pandemic. In addition, fiscal policy must be prepared to adjust current spending to the evolution of the situation”.

In this way, “the Commission considers that the conditions are met to maintain the general escape clause of the Stability and Growth Pact in 2023 and deactivate it as of 2024. The increase in uncertainty and strong downward risks for the economic outlook in the context of the war in Ukraine, unprecedented energy price increases and continued supply chain disruptions justify the extension of the general escape clause until 2023. The continued activation of the general escape clause in 2023 It will provide the space for national fiscal policy to react quickly when needed, while ensuring a transition from the universal escape clause to an increasing focus on temporary and targeted measures with the necessary fiscal prudence to ensure sustainability over the medium term. term”.

The Commission announces that it “will provide guidance on possible changes to the economic governance framework after the summer break and in time for 2023”.

The proposal comes after the European Commission lowered its growth forecast for the eurozone by more than one point due to the impact of the war, leaving it at 2.7% by 2022, and with inflation at 6.1%. In the data relating to Spain, the Brussels forecasts go from the 5.6% forecast on February 10, to the 4% of GDP announced now due to the impact of the war unleashed in Ukraine after the Russian invasion of the country. Brussels also cuts its forecasts for 2023 for Spain by one point, from 4.4% to 3.4%, delaying reaching pre-pandemic levels until the third quarter of 2023.