Because of the war, the EU will give up its budget corset in 2023

Fiscal discipline rules imposed on EU member states, which have not been applied since March 2020, remain suspended due to the economic shock from the war in Ukraine in 2023, the European Commission said on Monday.

Extraordinary measures in extraordinary times. Not yet recovering from the shock of the Covid pandemic, European economic activity is facing rising prices and a sharp slowdown in growth caused by the military conflict with Russia. In order to gain some breathing space, the EU prefers not to restore its budget corset until the end of next year.

“We propose to keep the general safeguard clause in 2023”, which allows to temporarily deviate from the debt and deficit limits set in the Stability Pact, said Commission Vice-President Valdis Dombrovskis during a press conference. “This offers scope for national budgetary policy to be able to react quickly if necessary,” he explained and called for consistent use of public funds.

This Commission position was well received by the EU finance ministers who met in Brussels in the afternoon and no one contradicted it.

The German Christian Lindner, on the other hand, expressed reservations. To fight inflation, we must “reduce deficits,” he said. He stressed that Germany would not use this fiscal flexibility and advised other countries to do the same. “We need to get out of debt as soon as possible, we need to return to the stability pact as soon as possible,” he said.

Economic activity is suffering from rising commodity prices, which are spreading beyond energy to include food prices. The conflict has also increased supply chain issues and uncertainty for both businesses and households.

Last week, the EU Commission had to drastically reduce its forecasts for economic growth for the EU and the euro zone in 2022, now expecting 2.7% compared to 4% at the beginning of the year and does not rule out a further deterioration.

– Outdated rules? –

However, massive investments are needed to eliminate Europe’s dependence on Russian oil, gas and coal as quickly as possible to stop funding Moscow’s war effort. On Thursday, Brussels presented a 210 billion euro plan to finance new energy infrastructure. In this context, it was tricky to impose too strict limits on public accounts.

“All Member States must promote and develop public investments for green and digital transitions and for energy security. However, strict control of other current expenditures is required,” especially for the most indebted countries, stressed Ms. Dombrovskis.

The Commission will not take action in the short term, but will monitor Member States’ compliance with its recommendations. The excessive deficit procedures provided for in European regulations will not be activated, at least until a new assessment, scheduled for autumn and then next spring.

The Stability Pact, which limits public deficits to 3% and debt to 60% of gross domestic product (GDP), was suspended in early 2020 due to the global Covid-19 pandemic. This allowed the 27 member countries to embark on extraordinary spending to support households and businesses to avoid an economic meltdown.

Brussels had planned to present proposals to reform this pact in June, at the request of several countries, including France, which considers it “obsolete”. They will finally be formulated “in the fall”, announced Valdis Dombrovskis. “The war in Ukraine has forced us to focus on emergency measures,” which is slowing down work on this reform, he explained. He stressed the need to find “a consensus” on this issue, which divided Member States.

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