Uncertainty directs EU guidance for 2023 fiscal policy
Valdis Dombrovskis - Photo © European Union 2022
(BRUSSELS) - The shadow of Russia's brutal attack on Ukraine hung over the European Commission's guidance to Member States on the conduct of fiscal policy in 2023, which it adopted in a Communication Wednesday.
The guidance sets out key principles to guide the Commission's assessment of Member States' stability and convergence programmes. It also provides an overview of the state of play on the economic governance review.
"This a challenging period for the European economy and our workers," said EC vice-president Valdis Dombrovskis: "After a strong EU response to the pandemic, we are facing new uncertainty with the barbaric Russian aggression in Ukraine, coupled with existing challenges such as inflation and high energy prices. Inevitably, our sanctions will have negative implications for the economy. But this is a price worth paying to defend democracy and peace."
In solidarity with Ukraine, the EU has approved an unprecedented package of economic sanctions that will have a severe impact on the Russian economy and political elite.
The invasion of Ukraine negatively impacts the growth outlook of the Winter Economic Forecast published on 10 February and tilts the risks further to the downside. The Communication sets out five key principles and draws implications for fiscal recommendations which the Commission will propose to Member States in May 2022 for their budgetary plans in 2023. These principles are:
- policy coordination and a consistent policy mix should be ensured;
- debt sustainability should be ensured through a gradual and high-quality fiscal adjustment and economic growth;
- investment should be fostered and sustainable growth promoted;
- fiscal strategies consistent with a medium-term approach to fiscal adjustment, taking account of the RRF, should be promoted; and
- fiscal strategies should be differentiated and take into account the euro area dimension.
The coordinated fiscal response of Member States to the severe economic downturn resulting from the COVID-19 pandemic has been successful, says the Commission, which suggests that transitioning from an aggregate supportive fiscal stance in 2020-2022 to a broadly neutral aggregate fiscal stance appears appropriate in 2023, while standing ready to react to the evolving economic situation.
The fiscal response to the COVID-19 pandemic and the contraction in output have resulted in a significant increase in government debt ratios, in particular in some high-debt Member States, though without rising debt servicing costs. Multi-year fiscal adjustment combined with investment and reforms to sustain growth potential is needed to safeguard debt sustainability. The Commission is of the view that starting a gradual fiscal adjustment to reduce high public debt as of 2023 is advisable, while too abrupt a consolidation could negatively impact growth and, thereby, debt sustainability.
Shifting EU economies to a higher sustainable growth path and tackling the challenges of the green and digital transitions should be a top priority for all Member States, says the EU executive. While the Recovery and Resilience Facility (RRF), at the heart of NextGenerationEU which will provide up to EUR 800 billion in additional financing, can help secure the twin transitions, the Commission is of the view that nationally financed high-quality public investment should be promoted and protected in medium-term fiscal plans.
Stability and convergence programmes should demonstrate how Member States' medium-term fiscal plans ensure a gradual downward path of public debt to prudent levels and sustainable growth, through gradual consolidation, investment and reforms.
National fiscal strategies should be appropriately differentiated:
- high-debt Member States should begin a gradual debt reduction, by delivering a fiscal adjustment in 2023, net of contributions from the RRF and other EU grants;
- low and medium-debt Member States should strengthen the necessary investment for the green and digital transitions, aiming at achieving an overall neutral policy stance.
Review of the EU's economic governance framework in October 2021 points to a number of key issues, where the Commission says further work could pave the way for an emerging consensus for the future EU fiscal framework:
- Ensuring debt sustainability and promoting sustainable growth through investment and reforms are key to the success of the EU fiscal framework;
- More attention to the medium-term in the EU fiscal surveillance appears as a promising avenue;
- It should be further discussed what insights can be drawn from the design, governance and operation of the RRF; and
- Simplification, stronger national ownership and better enforcement are key objectives.
Based on the ongoing public debate and the discussions with Member States, the Commission will provide orientations on possible changes to the economic governance framework, with the objective of achieving a broad-based consensus on the way forward ahead of 2023.
Questions and answers: European Commission presents fiscal policy guidance for 2023