EU Set to Prolong Suspension of Bloc’s Budget Rules Until 2023

(Bloomberg) -- The European Union's executive arm is likely to extend a suspension of the bloc's debt rules through next year amid uncertainty over the region's economic recovery.

In its guidance on fiscal policy for the coming months, the European Commission outlined its parameters for assessing whether to prolong a waiver of the EU's spending limits, signaling that it won't reinstate them at least until 2023. The commission first scrapped the rules last year as governments sought to cushion the blow of the pandemic with extraordinary levels of support.

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The euro-area economy contracted by 6.8% last year and the commission forecasts growth of 3.8% for this year. Prolonging the suspension of the EU's spending limits is yet another sign that the bloc's economies are likely to take a gradual approach in phasing out such support.

“One year on, the battle against Covid-19 is not yet won and we must ensure that we do not repeat the mistakes of a decade ago by pulling back support too soon,” EU Commissioner for Economic Affairs Paolo Gentiloni said. “For 2022, it's clear that fiscal support will still be necessary: better to err toward doing too much rather than too little.”

Uneven Recovery

While the official decision isn't due until May, the commission already said indications point to the rules not being reinstated until 2023. That's because doing so would require the EU economy to return to 2019 levels, something not foreseen until the middle of next year.

While the EU is broadly projected to reach its pre-pandemic economic levels in mid-2022, the situation will vary greatly across member states, with economies like Spain and Italy not seen recovering as quickly. In such cases, the commission said, the rules should use all the available flexibility within the EU framework to help economic activity recover.

The bloc's fiscal rules require countries to aim for budget deficits of less than 3% and debt burdens below 60% of gross domestic product -- failing that, they must set annual targets to show they're moving in the right direction. The commission expects those figures to be more than 6% and 100% for the euro area this year.

The rules were set to be rewritten before the pandemic started, as they were frequently breached and there was little evidence they were contributing to either stability or growth. Officials say talks on reviewing the framework will likely resume in the second half of this year.

The economic outlook, meanwhile, is still subject to a great deal of uncertainty. “A burst of post-crisis optimism could unleash stronger pent-up demand and investment projects,” the commission said in its guidance.

It cautioned, however, that a downside risk would see the pandemic proving more persistent or more severe in the near term. “This would delay the expected recovery, which would risk leaving deeper scars in the fabric of the European economy and society inflicted by the protracted crisis, through bankruptcies, rising long-term unemployment and higher inequalities,” it said.

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