After three years of running the tap to quench the thirst caused by the ravages of the coronavirus pandemic and the war in Ukraine, the European Union is preparing to shift towards a more restrictive fiscal policy. The economy ministers of the euro zone (Eurogroup) debate this Thursday the details and the formula of a roadmap that seeks to close the square of the circle between the reduction of the deficit and the increase in the investments necessary to promote the ecological and digital transition .
The European Commission underpinned this direction in its recent spring recommendations. The objective is now to put a stop and control the increase in public spending. This situation of budgetary consolidation was in turn endorsed a few days ago by the European Fiscal Board. After the bazooka of aid to companies and families in the framework of the health crisis and the extraordinary measures aimed at alleviating the effects of the energy crisis, the path for 2024 already leads through stricter budgetary rules.
“After years of expansionary fiscal orientation, we will recommend a more restrictive fiscal policy based on the disappearance of the [extraordinary] measures adopted in the framework of the energy crisis. The objective is very clear: we have to work in parallel with monetary policy to curb inflation. We are aware that it is something that we have not yet achieved”, asserted Paolo Gentiloni, Commissioner for the Economy, upon arrival at the meeting.
The European economy has weathered the unforeseeable socioeconomic and energy consequences of the war in Ukraine with more waist than was anticipated months before. Last June closed with the interannual inflation rate in the euro zone at 5.5%, according to the EU Statistical Office (Eurostat). It is the lowest rate since the start of the contest in the eastern neighborhood, which started on February 24, 2022.
A year ago, the Eurozone pulverized month after month a new inflation record. June 2022 left a rate of 8.6%. It was precisely that month in which the European Central Bank (ECB) ended eleven years without touching interest rates. The rest is history. Since then, the rise has occurred consecutively to the current 4% of the price of money. The Frankfurt falcons continue their flight and a new increase is expected at the meeting of governors that will take place on July 27.
The big elephant in the room continues to be the debate on the reform of fiscal rules. The European Ministers of Economy and Finance will meet on Friday in what will be the first meeting under the baton of the Spanish Presidency of the Council of the EU.
The economic vice-president, Nadia Calviño, has assured upon her arrival at the European Council building that she will put on the table of her community counterparts a proposal with four pillars to unblock one of the most complicated and ambitious dossiers of this semester. The four legs, without detailing, go through establishing a margin of maneuver around how the institutions would regulate the application; set the basic parameters to guarantee “credible and sustainable” debt reduction paths, create mechanisms that guarantee “effective” compliance with these rules and prevent the new framework from colliding with necessary investments.
Spain thus wants to lay the foundation for an intense negotiation that is expected to be narrow and that is clearly and publicly divisive. The orthodox Germany already showed a strong rejection to the proposal that the European Commission presented in April. The Community Executive designed a plan with ad hoc, personalized, flexible rules that fostered closer work and exchange with the Member States. A proposal aligned with the Spanish postulates, but which continues to invoke the nein of the German engine, which seeks to consolidate adjustment figures for countries with excessive debt, as is the case of Spain.
In the EU, there is a maxim that is applied on a regular basis and that comes to light especially when making difficult decisions: the 27 agree basically, in the analysis of the situation, but they often diverge on the form and the way to go to reverse the situation. Thus, there is a consensus in the reading that the rules of the past – the sacrosanct maximum 3% of GDP and 60% of public debt – cannot be applied to the present and the future.
The schedule is ambitious. The Spanish Presidency wants to promote the technical work in August to prepare the ground for the political debate, which would take place in the autumn. Important will be the next September Eurogroup held in Santiago de Compostela, which will serve as a temperature check.
The goal is to have a new framework by the end of this year, since on January 1 the escape clause expires and the fifth Presidency of the Council of the EU also puts its final touch. Together with the fiscal rules, this “golden Presidency” has the arduous mission of closing high-voltage legislation such as the immigration pact or the energy reform. And he must lead these negotiations in a climate of high electoral tension.
Ten days before the elections, Calviño has taken advantage of his time in Brussels to value the “good progress” of the Spanish economy: “Thanks to the trust that we have built over the years, Spain pays the same for its short-term debt as Germany. Spain has done its homework. It is necessary to avoid lurching, creating uncertainty or deteriorating the confidence of the markets and financial institutions. Avoid announcements and political guidelines that generate mistrust and a hole in public accounts”.
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