Budget rules to apply from 2023 to avoid ‘fiscal risks’ – Commission

European Commission executive vice-president for Economy, Valdis Dombrovskis. [EPA-EFE/MÁRIO CRUZ]

The European Commission’s executive vice-president, Valdis Dombrovskis, has argued that the provision of liquidity to the debt markets for “too long” in the European Union could result in “fiscal risks” and that therefore the EU’s rules on budgetary discipline are to be reactivated in 2023.

“Maintaining ample liquidity support for too long would carry budgetary risks, but on the other hand we should also avoid a sudden premature or uncoordinated removal of temporary support measures,” Dombrovskis said on Friday (21 May), citing the crisis caused by the COVID-19 pandemic.

Speaking to journalists at the Belem Cultural Centre in Lisbon after an informal meeting of EU finance ministers (Ecofin) hosted by Portugal as part of its presidency of the Council of the EU, he noted that “fiscal policy should continue to support, both this year and next” the economic recovery in the EU, adding “we can confirm our approach that we will keep the general escape clause activated in 2022, but no longer from 2023.”

In March this year, the commission approved a communication on the fiscal policy response to the COVID-19 crisis, opening the door to maintaining the so-called ‘escape clause’ of the Stability and Growth Pact into next year, reserving a definitive decision for May.

In an interview with Lusa earlier this month, Dombrovskis announced that “unsurprisingly” the EU’s rules on budgetary discipline for countries on issues such as their public sector deficit or debt should continue to be suspended in 2022, given the effects of the pandemic.

The official decision is to be made known in early June. Earlier this month, the commission’s spring macroeconomic forecasts brought an upgrade to forecasts for economic recovery, with projected growth of 4.3% this year in the euro zone and 4.2% in the EU as a whole, and 4.4% growth for both by 2022.

The EU executive has argued that the level of economic activity in the EU and euro zone, as against before the economic crisis, that is in late 2019, should be the key quantitative criterion for the overall assessment of whether to deactivate or continue to apply the derogation clause. The possible extension of the measure has been under discussion between EU member states, not least because the economic recovery is not expected to be complete before 2022.

Last year, and in view of the unprecedented impact of the pandemic, the EU activated the clause that temporarily suspends rules on budgetary discipline to enable member states to cope with the situation.

At Saturday’s news conference, Dombrovskis also said that at the day’s Ecofin meeting, ministers had discussed “the risks and challenges ahead in the context of economic recovery” following the pandemic.

“As with other previous crises, this one has left undesirable legacies, such as high public and private debt and a negative impact on social and labour markets,” he noted, adding that “European banks … will play an important role in ensuring a successful and uniform economic recovery.”

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