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EU set to extend suspension of budget rules

EU set to extend suspension of budget rules

3 min. 03.03.2021
Commission guidance will underline conditions under which Brussels would consider ending the suspension of the stability and growth pact
The European Commission building in Brussels
The European Commission building in Brussels
Photo credit: AFP

By Sam Fleming

Brussels is set to signal the suspension of its fiscal rules for an extra year in 2022 and assure member states it will use all the flexibility it has available when they are eventually reimposed, as the European Commission seeks to sustain budgetary support in the face of powerful economic headwinds.

Commission guidance to be published on Wednesday will spell out the conditions under which Brussels would consider ending the suspension of the stability and growth pact (SGP), officials said, with the regime set to be reactivated only when output returns to pre-pandemic levels. The commission’s current forecasts suggest that will not happen until the middle of next year. 

In addition, the communication is expected to reassure member states that Brussels will not be overly rigid in applying the SGP rules when they do come back into force — something that could happen in 2023 depending on future forecasting rounds.

Early in the pandemic last year Brussels took the unprecedented step of activating its so-called general escape clause from the SGP, effectively suspending member states’ obligations to work towards the eurozone’s debt and deficit targets. The move was prompted by the scale of the expected downturn as Covid-19 forced member states into lockdowns. 

Valdis Dombrovskis, the commission’s executive vice-president, in August said Brussels intended to keep the escape clause in place in 2021 as well. Last year the eurozone suffered a 6.8 per cent contraction, with a rebound of just 3.8 per cent envisaged by the commission this year and the same next. The slump is set to push average debt levels to 100 per cent of gross domestic product.

The commission’s overriding message now will be that it is far too soon to be reining in budgetary support in the EU, and that even when the fiscal rules kick back in that will not entail a shift to austerity.

Paolo Gentiloni, the EU’s economics commissioner, said last week that when it came to fiscal policy “the risks of doing too little outweigh the risks of doing too much”. The commission’s guidance is likely to reflect that stance, officials said, as it seeks to encourage member states to invest in their recoveries.

This involves maximising the use of the funds available from the EU’s €750bn recovery fund, which should start paying out this summer. Brussels argues this EU money should help economically embattled member states avoid overburdening their public finances by racking up too much debt on their own balance sheets to fund spending. 

Once the time comes to reimpose the SGP, officials are determined to take into account the very different economic conditions that could prevail across the bloc. According to the EU’s most recent forecasts, by the final quarter of 2022 output in both Spain and Italy will still not have recovered to pre-pandemic levels, and Portugal may be only slightly ahead.

As such the commission is expected to telegraph a readiness to interpret the rules flexibly to take into account weaker economic positions in some countries, making the most of the wriggle room it has within the framework. 

All this leaves aside the broader question of whether the EU should be embarking on a significant overhaul of the SGP given the surge in debt loads during the pandemic, as well as longstanding controversies surrounding the enormously complicated framework.

Brussels is likely to hold off tabling any recommendations for reform of the SGP until well after German elections in September, given the huge sensitivity of the issue. 

But some politicians have already been setting out their stall. Last year Clément Beaune, France’s Europe minister, said it was “unimaginable” that the SGP could be reimposed in its current form after the crisis. 

“We will have even more debt, which will be very different from the world we knew a few years ago throughout Europe,” Beaune said. That message was echoed by Gentiloni last week, who said the EU should not rule out legislative reforms, rather than tweaks to interpretative guidance. “If not now, when?” he asked.

Any reforms would need to win acceptance not only among member states, but within the commission itself. If the EU goes down the path of legislative change, it is possible the new regime would not be in force by the time Brussels is ready to end the general escape clause.

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