EU prolongs suspension of debt rules due to war turbulence

The European Union’s strict limits on public borrowing and spending are to be kept suspended for an extra year as countries cushion the economic impact of the invasion of Ukraine, the European Commission has announced.

The stability and growth pact rules, which require countries to keep their public deficit under 3 per cent and debt under 60 per cent of GDP, were suspended in March 2020 to help member states cope with the impact of the Covid-19 pandemic.

On Monday the European Commission proposed extending this suspension for an additional year, rather than forcing countries to sharply reduce spending at a time when governments want more firepower to combat the impact of the war and the soaring cost of living.

“It’s now very clear that the economic toll of this war is worldwide. High prices and disruption to food supplies are rippling across the world, with very serious consequences for the most vulnerable in our societies. And of course, the euro area is facing these challenges too,” Minister for Finance Paschal Donohoe said after chairing a meeting of counterparts as president of the Eurogroup.

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“Our discussion today showed that many member states are indeed cushioning the blow for their citizens, especially for the most vulnerable households,” he continued.

“That’s why the commission’s announcement on keeping the January escape clause activated for another year is an important development at the same time,” he said.

“This decision doesn’t change our objective of progressively shifting our fiscal stance from supportive this year to neutral next year. And there is broad agreement among ministers that we need to strive to continue to make our budgetary policy and decisions as sustainable as possible in this uncertain environment.”

The aim of keeping the suspension is to allow governments to help soften the impact of the energy crisis and provide humanitarian assistance to those fleeing Ukraine, according to the European Commission.

Targeted measures

In a statement on Monday, it said that the broad-based pandemic support measures that the suspension of the rules facilitated should be replaced by more temporary and targeted measures, and fiscal prudence.

“Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Ukraine, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause through 2023,” the statement read.

“The continued activation of the general escape clause in 2023 will provide the space for national fiscal policy to react promptly when needed.”

In the years ahead, significant public and private investment will be required to meet the EU’s goals of transitioning to carbon-neutral economies, building energy independence, and defence capabilities, the commission’s economy commissioner Paolo Gentiloni said.

“We collectively face a mountain of investments in the coming years,” he told journalists. “So fiscal policy should expand public investment for the green and digital transition and for energy security.”

He warned, however, that countries should still pursue “prudent fiscal policies”. “It does not mean ‘free for all’,” Mr Gentiloni said.

The European Commission had expected to reintroduce the rules at the end of this year, before the invasion changed the economic outlook. Many EU member states exceed the debt and spending limits, despite the rules, and there have been calls from some capitals for them to changed to exempt important investments.