Commission urges that fiscal support should continue as long as needed

The general escape clause would remain active in 2022 and be deactivated in 2023

Photo: EU Valdis Dombrovskis (L) and Paolo Gentiloni (R).

‘One year since the outbreak of Covod-19: fiscal policy response’ is the title of the Commission’s Communication adopted on Wednesday. It says that the economic outlook remains highly uncertain and does not allow for a firm anticipation of the end of the severe economic downturn in the EU or the euro area, and provides EU countries with wide-ranging guidance on the conduct of fiscal policy in the period ahead.

It displays the considerations of the EU executive concerning the deactivation or prolongation of the general escape clause. The document makes available general indications on the overall fiscal policy for the period ahead, including the implications of the Recovery and Resilience Facility (RRF) for fiscal policy.

The Communication supports the objectives for ensuring a coordinated and consistent policy response to the current crisis and requires credible fiscal policies that address the short-term consequences of the coronavirus pandemic and support the recovery, while not endangering fiscal sustainability in the medium-term.

Fiscal policy should remain agile and adjust to the evolving situation. The Commission warns against a premature withdrawal of fiscal support, which should be maintained this year and next and provides that once health risks diminish, fiscal measures should gradually turn to more targeted and forward-looking measures taking into account the impact of the RRF, the strength of the recovery and fiscal sustainability considerations.

This guidance will facilitate Member States in the preparation of their stability and convergence programmes, which should be presented to the Commission in April 2021 and will be further detailed in the Commission's European Semester spring package.

The Communication sets out the Commission's considerations for how a future decision on the deactivation of the general escape clause proposed last March or its continued activation for 2022 should be taken.

The EU executive suggests that the decision should be taken following an overall assessment of the state of the economy based on quantitative criteria, starting with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019). Current preliminary indications would suggest to continue applying the general escape clause in 2022 and to deactivate it as of 2023.

After a dialogue with the Council, the Commission will assess the deactivation or continued activation of the general escape clause on the basis of the 2021 Spring Forecast, which will be published in the first half of May. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.

There is hope on the horizon for the EU economy, but for now the pandemic continues to hurt people's livelihoods and the wider economy, Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People commented. To cushion this impact and to promote a resilient and sustainable recovery, our clear message is that fiscal support should continue as long as needed, he said noting that based on current indications, the general escape clause would remain active in 2022 and be deactivated in 2023.

According to him Member States should make the most of the Recovery and Resilience Facility, as this gives them a unique chance to support their economy without burdening public finances. Timely, temporary and targeted measures will allow a smooth return to sustainable budgets in the mediumterm, he stated as well.

Paolo Gentiloni, Commissioner for Economy underscored that the Commission’s decision last March to activate the general escape clause was “a recognition of the gravity of the unfolding crisis”. It was also a statement of our determination to take all necessary steps to tackle the pandemic and support jobs and companies, he said accenting that one year on, the battle against Covid-19 is not yet won.

“We must ensure that we do not repeat the mistakes of a decade ago by pulling back support too soon. For 2022, it is clear that fiscal support will still be necessary: better to err towards doing too much rather than too little. At the same time, fiscal policies should be differentiated according to the pace of each country's recovery and their underlying fiscal situation. Crucially, as funding from Next Generation EU begins to flow, governments should ensure that national investment spending is preserved and strengthened through EU grants,” Commissioner Gentiloni explained.

The role of Recovery and Resilience Facility will be crucial in propping up Europe recover from the economic and social impact of the pandemic and will help to make the EU's economies and societies more resilient and secure the green and digital transitions.

With €312.5bn in grants and up to €360bn in loans, the facility will support Member States in implementation of reforms and investments and will provide a sizeable fiscal impulse and help mitigate the risk of divergences in the euro area and the EU.

“The implementation of the RRF will also have important implications for national fiscal policies. Expenditure financed by grants from the RRF will provide a substantial boost to the economy in the coming years, without increasing national deficits and debt. It will also spur Member States to improve the growth-friendliness of their fiscal policies. Public investment funded by RRF grants should come on top of existing levels of public investment,” the Communication read.

It also says that Member States should make best use of the unique window of opportunity provided by the RRF to support the economic recovery, foster higher potential growth and improve their underlying fiscal positions in the medium to long term.

Public debate on the economic governance framework will continue once the recovery takes hold and relaunching the public consultation on it will allow the Commission to reflect on the challenges and draw lessons. 

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