Remarks by Executive-Vice President Dombrovskis at the press conference on the fiscal policy guidance for 2023
Ladies and gentlemen,
I will start with Ukraine, a country which I know well and for which I have a great affinity.
Events there continue to move very quickly, very much by the hour. On many levels, we are in uncharted territory.
This makes it difficult – if not impossible – to assess the economic impact of this invasion at this stage.
I would like, first and foremost, to express condolences to the families and close ones of the victims of this aggression.
We are making every effort to support our neighbouring Member States to host and take care of refugees fleeing from this aggression.
We are making every effort to support Ukraine.
Russia’s unprovoked, illegal military attack against a sovereign country and its innocent people is not going unpunished.
Over the past days, we have unleashed on the Kremlin one wave of sanctions after the other, designed to have a massive impact. Russia is clearly feeling the pain.
Only yesterday, we banned a number of Russian banks from using SWIFT. And we already have sanctions on the financial sector, companies and banks. The assets of Putin and other politicians have been frozen, along with those of Russian oligarchs.
Just this week, the Russian rouble lost 25 percent of its value. Investors are losing faith in Russia’s economy and financial sector.
This is the price that the Kremlin must pay for its aggression and gross violation of international law.
This is the effect of powerful sanctions coordinated not only within the European Union but also by its key allies around the world.
And this is the intention: to weaken Russia’s economic base, deprive it of critical technologies and markets, and cripple Putin’s ability to finance his war machine.
We will continue to put maximum pressure on the Kremlin as long as Russia refuses to halt its aggression.
It is already on the path to becoming a pariah state.
Europe’s sanctions will naturally have implications and a cost for the EU economy. At this stage, they are difficult to calculate reliably.
As deeper sanctions begin to bite, we could see a number of scenarios. For example: higher inflation, more pressure on energy prices, an adverse impact on financial markets. Growth will continue but it will clearly slow.
But it is a price worth paying for defending democracy – and the right of European nations to determine their own destiny.
From an economic point of view, the EU’s underlying fundamentals area are strong. Our response to the pandemic and ensuing crisis – rapid and massive coordinated support to prop up people’s lives and livelihoods – has paid off.
We put a package in place that is unprecedented in size and scale: Next Generation EU, and its main funding instrument, the Recovery and Resilience Facility.
We are ready and able to withstand any negative impact from this war. But these are very uncertain times.
The invasion of Ukraine and the resulting geopolitical tensions have made that worse, raising immediate questions about our security and stability.
So it is more important than ever to focus on maintaining stability. That means making Europe more resilient: ready to withstand future shocks. And to stay on track in equipping our economies for the future, by making the green and digital transitions happen.
The Communication on “Our European Growth Model”, which the college also adopted today, provides a ‘diagnosis’ of the strengths and weaknesses of the European economy.
It brings together our economic policy priorities and connects the instruments and policy actions to deliver on them. This crucially involves both reforms and investments. And it crucially involves both the EU and the national level, as well as the private sector.
For this year, we need to continue supporting our economies with targeted measures. As you know, the General Escape Clause stays activated this year.
We will need to remain agile and adjust our policies as needed.
Our current projections indicate that the General Escape Clause is due to be deactivated as of 2023. But, in view of the uncertainty, we will re-assess this in spring.
This brings me to today’s guidance for next year.
It aims to facilitate coordination of fiscal policies in 2023 based on several principles. The idea is to help the preparation of Member States’ stability and convergence programmes.
Given the many risks and uncertainties at present, we will need to evaluate constantly and adjust the guidance as needed.
Our priority is to move all EU economies towards higher sustainable growth and provide a solid financial foundation to underpin the green and digital transitions.
Firstly, it is essential to keep fiscal policy coordinated across the EU. Budget support should stay, on average, at broadly the same level as this year. In other words, a “neutral fiscal stance”.
Then, to tackle risks related to fiscal sustainability, high-debt Member States should start to rebuild fiscal buffers gradually and in a growth-friendly way.
This is a lesson that we learned the hard way from the last financial crisis. You use periods of growth to build buffers so you are in a stronger position if and when bad times come around the corner.
This means one should not only rely on reducing budget deficits.
Investments and reforms are also very important.
All Member States should promote and protect public investment in their fiscal plans.
This underscores the importance of improving the quality and composition of public finances.
Lastly: national fiscal strategies should reflect each country’s individual circumstances. This is not a ‘one size fits all’ concept.
High-debt countries should prioritise a gradual improvement of fiscal positions as of next year, by limiting current expenditure growth, while protecting investments.
Low-debt countries should prioritise investments for the green and digital transitions. There is less urgency for them to make a fiscal adjustment in 2023.
Due to the exceptional uncertainty, we do not propose opening new excessive deficit procedures in spring 2022. We will re-assess the relevance of proposing to open EDPs in the autumn.
For Member States with a debt ratio above 60% of GDP, the Commission will consider that compliance with the debt reduction benchmark is not warranted under these exceptional conditions.
We will not be applying the one twentieth rule for those countries with a debt ratio above 60% of GDP.
At the same time, we will continue to monitor deficit and debt developments.
Ladies and gentlemen, these are exceptional times.
We are in a period of very high uncertainty. Our policies need to remain agile.
We need to monitor developments very closely, see how different risks are evolving, and adjust our policies as necessary.
Thank you and now I pass the floor to Commissioner Gentiloni.
Remarks by Commissioner Gentiloni at the press conference on the fiscal policy guidance for 2022
We stand here today in extraordinary circumstances. War has returned to the European continent. Just three weeks ago, when I presented our winter forecast, a deterioration of the geopolitical situation was still considered a downside risk. Last Thursday it became a tragic reality.
As a reminder, our winter forecast projected growth of 4% in 2022. What impact will the war have on this outlook? Clearly, it has increased already high uncertainty and shifted risks markedly to the downside. Russia’s invasion of Ukraine will likely impact EU growth negatively, including through repercussions on financial markets, further energy price pressures, more persistent supply-chain bottlenecks and confidence effects.
Of course, energy prices are central to possible consequences for the outlook. The spot prices of energy commodities, oil and in particular gas, have continued to increase. This morning, the Dutch TTF gas benchmark increased by 28.6% compared to Tuesday, as the latest rounds of sanctions on Russia fuelled concerns about shortages, and was by 85.1% higher compared to a week before. Market expectations have also adjusted, with futures curves shifting upwards for oil, gas and electricity. Prices are now assumed to remain at elevated levels for the whole of 2022.
Overall, this combination will likely weigh significantly on the expected economic expansion in the EU but without derailing it. We will need to monitor the economic and social situation very carefully over the coming weeks and months – and stand ready to react to the rapidly changing circumstances.
This is the backdrop against which we are presenting our fiscal guidance for 2023. Our aim is to guide Member States in the preparation of their Stability and Convergence programmes by providing some general principles and discussing their implications for the design of fiscal policies for next year.
We decided last year that the General Escape Clause would continue to apply in 2022. This will help Member States to take the necessary measures as needed to face the immediate challenges of this crisis. Given the current uncertainty, we will need to reassess the expected deactivation of the General Escape Clause in 2023 on the basis of our spring forecast, which I will present in mid-May.
In times like these, the coordination of economic and fiscal policies is particularly important. Such coordination has been key for successfully weathering the COVID crisis. Our guidance today builds on the positive experience with the similar guidance we provided in March 2021, one year ago. It takes into account both the global and country-specific situations as well as the ongoing discussion on the economic governance review.
This guidance is of course contingent on the evolving economic outlook. It will have to be updated as necessary, at the latest as part of the European Semester Spring package in May when we will present the country-specific recommendations.
Our guidance today sets out five general principles and draws implications from these for fiscal policy for 2023. Let me run through these for you:
First, we make clear that the appropriate fiscal stance for the euro area should result from a proper balance between sustainability and stabilisation needs. On this basis, a broadly neutral aggregate fiscal stance appears appropriate for 2023. This statement is based on our winter forecast: again, we must stand ready to react as necessary to the evolving situation.
Second, ensuring debt sustainability through a gradual and high-quality fiscal adjustment and economic growth remains key. A gradual fiscal adjustment to reduce high public debt could begin in 2023. As we have previously stated, too abrupt consolidation could negatively impact growth and, thereby, debt sustainability. So this should be avoided.
Third, fostering investment and promoting sustainable growth should be at the top of the agenda. Medium-term plans should promote and protect nationally financed public investment, in particular for the twin transition and for enhancing resilience. Investment holds the key to our future prosperity.
Fourth, fiscal strategies should be consistent with a medium-term approach. That implies three things: avoiding an undue delay in fiscal consolidation; taking into account the fiscal impulse provided by the RRF; and putting forward coherent investments and reforms to promote sustainable growth.
Fifth, fiscal strategies should be differentiated across Member States. That means that high-debt Member States should start to deliver a fiscal adjustment in 2023, by limiting the growth of current spending, while promoting overall investment. And it means that low/medium-debt Member States should continue prioritising investment and ensure that developments in current spending are in line with preserving an overall neutral policy stance. In other words, these countries should not deliver a fiscal adjustment in 2023.
Given the exceptional uncertainty, the Commission will not propose to open new Excessive Deficit Procedures this spring. We will look at the issue again in the autumn.
Also in view of this uncertainty, we are confirming today that our recommendations for 2023 will again be formulated in qualitative terms, with a quantitative underpinning.
The nature of this guidance is linked to the ongoing discussion of the economic governance review. In our Communication today we have mentioned a number of key considerations emerging from the ongoing debate that merit further work with the aim of building a consensus.
First, a successful EU fiscal framework needs to ensure debt sustainability and promoting sustainable growth through investment and reforms. Our fiscal strategies should reduce high public debt ratios in a way that is realistic, gradual and sustained, and at the same time should promote growth through investment and reforms.
Second, we need to explore how to pay more attention to the medium-term in EU fiscal surveillance. In addition to monitoring Member States’ fiscal performance each year, and subject to clear EU level guidance, there could also be more scope for Member States to set and implement their own medium-term fiscal adjustment plans, incorporating their investment and reform agendas into their fiscal trajectory. This could strengthen ownership and thus compliance.
Third, we should further discuss what insights can be drawn from the design, governance and operation of the RRF. There are lessons that we can learn here in terms of ownership of policy design and outcomes, mutual trust, enforcement and the interplay between the economic and fiscal dimensions, and the EU and national dimensions.
And lastly, simplification, stronger national ownership and better enforcement are key objectives. The current reliance on non-observable variables that are sensitive to change causes complexity and undermines transparency. Moving towards using one operational rule at the EU level with observable indicators, such as a net expenditure aggregate, could address these problems. A simpler framework would also improve the readability of EU budgetary surveillance and thereby contribute to clearer communication, increased ownership, better compliance and stronger enforcement.
To conclude, we have set out today our preliminary fiscal policy guidance for 2023. It is based on what we know – the analysis underpinning our winter forecast – but with the caveat that there is a great deal that today we do not know. This is why our guidance will need to be updated as necessary, depending on developments.
As we make clear in the second Communication adopted today on a future-proof European growth model, the global challenges Europe is facing also provide an opportunity: to renew our resolve and commitment to economic transformation and to reinforce cooperation with our international partners. Our coordinated policy response enabled us to weather the economic storm caused by the pandemic.
Now as we stand strong and united in the face of Russia’s attack on Ukraine and on all the values we hold dear, we must also be galvanised to deliver the ambitious investments and reforms needed for the green and digital transition and to safeguard the prosperity and wellbeing of all our citizens.