Commission defends gradual return to fiscal discipline to avoid ‘mistakes’ of austerity

Several people put donated food rations in their shopping carts at Red Cross' warehouse in Mataro, Barcelona, Spain, 20 May 2020. The NGO takes care 4,069 people currently in comparison with some 2,010 people looked after in January due to economic crisis caused by COVID-19 lockdown. [EPA-EFE/Enric Fontcuberta]

The European Commission could start controlling deficit and debt levels from next year, once the recession is over. But the road to balancing public accounts again will avoid the “mistakes” of the last crisis, the institution said on Wednesday (20 May). 

The Commission presented on Wednesday its country specific recommendations for member states, as part of the European Semester mechanism to coordinate their economies and monitor their public finances.

With the EU facing up to the coronavirus pandemic – the most severe crisis in its history – this year’s exercise was exceptional. The EU executive has already suspended the enforcement of the deficit and debt limits, with all economies set to breach the deficit threshold of 3% of GDP.  

Coronavirus will trigger the deepest recession in EU history

The economies of EU countries will shrink by 7.4% this year as the coronavirus crisis is set to cause the worst recession in the bloc’s history, according to the European Commission’s spring forecast presented on Wednesday (6 May), which also foresaw a significant rebound in 2021.

In addition, most of the recommendations addressed to the national governments focused on ways they can bolster their capacities in the aftermath of the pandemic, including health, and support for workers and companies.

The EU is expected to grow by over 6% next year, which would reactivate the Stability and Growth Pact from next year. But given “the high level of uncertainty” about the evolution of the pandemic, Commission vice-president, Valdis Dombrovskis said that “we cannot put a specific date” at this stage.

He added that the Commission will assess the fiscal situation across the bloc again in the autumn.

Commission proposes unprecedented suspension of EU’s fiscal rules 

The European Commission proposed for the first time on Friday (20 March) the activation of the general escape clause that would ‘pause’ the adjustments member states have to do to meet their fiscal targets and allow them to spend “as much as they need”.

But the Commission wants to avoid the mistakes made following the financial and eurozone crises of a decade ago. 

“Once fiscal policy normalises, it will be vital to avoid making the mistakes of the past. In the fiscal consolidations of 10 years ago, investment was the first victim,” Economics Commissioner Paolo Gentiloni said.

“To repeat this approach will mean to sacrifice our long term priorities”, including the digital transformation or the Green Deal, he added.

The EU focused on austerity to balance the fiscal stimulus adopted in the aftermath of the 2008-9 financial crisis, resulting in a self-inflicted recession in 2012.

Dombrovskis added that once the fiscal rules are reinstated, the Commission will take into account that the starting position of deficit and debt levels will be “much higher” when deciding on the fiscal paths to return to deficits below 3% of GDP and debt levels under the 60% of GDP threshold.

In addition, the adjustment effort could be also more limited depending on the countries’ position in the economic cycle.

EU officials told EURACTIV that enforcing the deficit and debt limits from next year wouldn’t necessarily mean a sudden imposition of adjustments, as the recommendations would be included next spring for 2022.

Conditionality 

The recommendations issued by the Commission this year will have a special weight, as they will help member states hoping to access substantial sums from the new EU recovery fund.

Dombrovskis stressed that there will be “a clear link” between the recommendations and the financing of the new recovery and resilience facility. According to Commission president, Ursula von der Leyen, this facility will channel the bulk of the EU recovery funds.

EU recovery funds will come with strings attached 

The EU’s unprecedented stimulus to recover from the COVID-19 pandemic will come with certain conditions which should reflect the extraordinary nature of this crisis and the European goals, senior MEPs and diplomats have said

As a result, the recovery fund, to be presented on 27 May,  will be an “additional tool” to ensure that national governments implement their recommendations, Dombrovskis said.

“I’m certain that member states, bearing in mind what is at stake, will pay attention to these recommendations,” added Gentiloni.

In order to control the conditionality to access the recovery funds, the Commission will follow the model approved for the budgetary instrument for competitiveness and convergence. 

Accordingly, national governments will agree on a set of priorities, and member states will present “recovery and resilience plans” reflecting those goals to access the recovery funds. The Commission would be in charge of monitoring the implementation of the whole process. 

The country specific recommendations should provide “guidance” in preparing those national plans, said Dombrovskis. But he did not clarify whether countries would lose funds if they did not follow the Commission’s proposals.

[Edited by Benjamin Fox]

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