EU likely to waive borrowing limits again in 2022

EU commissioner for Economy Paolo Gentiloni removes his protective face mask, as he arrives for a press conference on the Winter (Interim) Economic Forecast, at EU headquarters in Brussels, Belgium, 11 February 2021. [EPA-EFE/KENZO TRIBOUILLARD]

The European Union is likely to waive limits on government borrowing again in 2022, given persistent uncertainties about the pace of economic recovery once the coronavirus pandemic is contained, officials say.

The European Commission will set the criteria on March 3 for a recommendation later in the year on whether the bloc’s fiscal rules should be reinstated in 2022 or stay suspended.

Both options remain possible. But European Economic Commissioner Paolo Gentiloni told a European Fiscal Board conference on Friday that, in terms of fiscal support under current conditions, “the risks of doing too little outweigh the risks of doing too much.”

The EU’s biggest fiscal hawk, Germany, has already decided to extend that principle into next year.

Both Social Democrat Finance Minister Olaf Scholz and Christian Democrat Party leader Armin Laschet say the country’s debt brake should stay suspended in 2022, and maybe beyond.

The EU’s fiscal rules require governments to strive towards budget balance in structural terms and cut debt every year until their debt-to-GDP ratio reaches 60%.

But with EU governments putting up trillions of euros to keep their coronavirus-ravaged economies going, the rules were suspended at the start of the pandemic under a “general escape clause” built into them.

The final EU decision on whether to restore borrowing limits will come in May.

Dombrovskis: Continued suspension of EU Stability Pact will depend on spring assessment

The suspension of the Stability and Growth Pact in 2022 will depend on economic developments, European Commission executive vice-president Valdis Dombrovskis told EURACTIV’s partner Lusa, pointing to a possible decision in the spring.

With one eye on German federal elections in September, Scholz will meanwhile will present his draft budget for 2022 as soon as next month, and officials say steep spending cuts are unlikely.

Commission forecasts show the EU economy will not return to pre-crisis levels before the middle of 2022, and governments expect a wave of bankruptcies as soon as they start withdrawing the blanket financial help being offered now.

Euro zone officials said the fiscal rules should be suspended until the economy returned to pre-crisis levels.

“De-activating the General Escape Clause at the end of 2021 and returning to the current fiscal rules would have very negative effects on sustainable growth,” one senior euro zone official said.

Economic support will last 'as long as necessary', says Gentiloni

Given the increasing number of covid-19 cases and the risk of a double-dip recession, the support to the European economy will be maintained “as much as is needed, for as long as is needed”, said on Tuesday (27 October) commissioner for Economy, Paolo Gentiloni.

Stability and growth pact review

Meanwhile, the European Commission is preparing proposals to amend the EU’s fiscal rules for discussion by EU finance ministers later this year.

The rules, called the Stability and Growth Pact, were agreed in 1997 as a way to coordinate independent fiscal policies in a monetary union where the same interest rates are set for all countries using the euro.

They have been revised three times since, making them more complex each time, and the European Commission is conducting a review now to simplify and focus them more on indicators that are directly under the control of governments.

According to Gentiloni, the rules should be amended to be more medium-term oriented and give special treatment to government spending that boosts economic growth potential.

“Special treatment for growth-enhancing expenditure is in my view needed,” Gentiloni said. “Our fiscal rules should be adapted to improve the composition of public finances and make sure that any new debt is good debt.”

Good debt, he said, was money borrowed to finance research, education, infrastructure, or health care, as opposed to paying for current expenditures with no impact on productive capacity, which he called bad debt.

“The current rules lack a sufficient medium-term focus. Yet the main goal of fiscal rules should be to prevent unsustainable public finance trajectories, which can only be achieved by focusing on the medium term,” Gentiloni said.

“While a strict debt rule could lead to a drastic, pro-cyclical and self-defeating adjustment, a credible mechanism to steer debt onto a gradual and steady downward trajectory remains warranted.”

“We should have a reflection on whether there is a need to turn to the general escape clause more often in economic downturns, in order to account for the effective lower bound on monetary policy,” Gentiloni continued.

“A single, more readily usable escape clause could be balanced by eliminating the multitude of exceptions that currently apply to the normal provisions of the Pact.”

EU fiscal watchdog wants to scrap 'unrealistic' 60% debt limit

The European Fiscal Board on Tuesday (1 July) recommended to get rid of the EU’s debt threshold of 60% of GDP and instead adopt realistic debt targets specific to the bloc’s national economies.

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