They have not been used since March 2020 and will not be used in the coming months either. The rules of budgetary discipline imposed on the member states of the European Union will remain suspended in 2023, Commission Vice-President Valdis Dombrovskis announced during a press conference on Monday. “We propose to keep in 2023 the general safeguard clause” that allows to temporarily deviate from the debt and deficit limits set in the Stability Pact, he explained.
“Increased uncertainty and significant downside risks to the economic outlook amid the war in Ukraine, unprecedented energy price hikes and ongoing supply chain disruptions justify the extension” of this suspension, which had already been extended to 2022 in June 2021, the European institution said in a press release.
The challenge to the sovereignty of the European Union
Collectively known as the Stability and Growth Pact (PSC), these rules, adopted in 1997, aim to coordinate national budgetary policies within the euro area and avoid the occurrence of excessive budget deficits. They therefore require governments to keep their budgets close to balance or in surplus. Except in exceptional cases, if a government deficit exceeds 3% of a country’s GDP, an excessive deficit procedure is initiated and the country concerned is warned by the European Commission. “If the state does not end the excessive deficit within the given deadline, the Council can impose sanctions: deposit to the ECB (European Central Bank), which can lead to a fine (from 0.2 to 0.5% of the GDP of the concerned State) if the excessive deficit is not remedied”, specifies the website vie-publique.fr.
Another rule stipulates that the government debt of the states does not exceed the ceiling of 60% of GDP, but the Commission had already announced last March that this rule will not be applied in 2023 either. Countries like Italy, whose debt is 160% of GDP, or Greece, where it exceeds 200%, are unable to apply such a rule. “This offers scope for national budgetary policy to be able to react quickly if necessary,” added Valdis Dombrovskis. This is particularly true for France, for which this pause in the Maastricht rules has allowed it to fully implement its policy “at any cost”.
Call for severity
However, the Vice President of the European Commission urges strictness. “Fiscal policies must be prudent in 2023 and control the growth of publicly funded primary current expenditure,” stressed the Commission. Fiscal policy must be ready to adapt to changing circumstances, and Brussels will make further recommendations after the summer.
Stagnation in the euro zone: no danger, assures the ECB
Last January, former Public Finance Minister Olivier Dussopt announced that the French deficit would reach 7% of GDP for 2021. However, this result, which is far from the PSC’s target, is better than what was feared at the beginning of the year, which was anticipating a deficit of around 8%. In detail, the national deficit amounts to 171 billion euros, which is “almost 34.5 billion less than our last forecasts”. As for Social Security, it would be around $25 billion over the course of the year.
Growth prospects downgraded
But if Brussels has declared its willingness to be conciliatory towards the budgetary discipline of the member states, it is because the European institution has opted for solid growth. A bet that promised to win at the start of 2022, as GDP growth in the eurozone has never been higher since Eurostat started these statistics in 1996. In 2021, GDP thus increased by 5.2% across the European Union. A historic figure, higher than the previous forecast (5%), testifying to the rapid recovery of the European economy after the no less historic economic slump linked to the Covid-19 pandemic: in 2020, GDP was around -6.4 % fell the 19 countries with common currency and -5.9% within the EU.
But the outbreak of war in Ukraine has dampened optimism. On May 16, the European Commission published new forecasts for 2022, which project GDP growth of 2.7% in 2022 and 2.3% in 2023 within the European Union (EU) and in the euro. The European executive had predicted growth of 4% in 2022 and 2.8% in 2023 three months earlier.
For its part, Germany judged the situation as not serious enough to justify a one-year extension of the safeguard clause. His finance minister, Christian Lindner, said his country would not apply it. “From our point of view, the data situation is not such that a suspension of the stability pact rules would be absolutely necessary,” he said. “Germany will have no use for it anyway.”
(With AFP and Reuters)