Consequence of the war in Ukraine, Brussels is still postponing the return of budgetary rigor

Le pacte de stabilité et de croissance est suspendu depuis mars 2020, conséquence de la crise économique provoquée par l

They had not been applied since March 2020 and will not be applied in the months to come. The rules of budgetary discipline imposed on the Member States of the European Union will remain suspended in 2023, announced on Monday, the Vice-President of the Commission, Valdis Dombrovskis, during a press conference. “We propose to maintain the general safeguard clause in 2023”, which allows temporary derogation from the debt and deficit limits set by the Stability Pact, he said.

“Increased uncertainty and significant downside risks to the economic outlook amid the war in Ukraine, unprecedented energy price hikes and ongoing supply chain disruptions warrant the extension” of this suspension which had already been extended in June 2021 for 2022, explained the European institution in a press release.

The Challenge of European Union Sovereignty

Gathered under the name “Stability and Growth Pact” (PSC), these rules, adopted in 1997, aim to coordinate national budgetary policies within the euro zone and to avoid the appearance of excessive budgetary deficits. . They therefore require States to have budgets that are close to balance or in surplus. In the event of a public deficit exceeding 3% of a country’s GDP, except in exceptional circumstances, an excessive deficit procedure is initiated and the State in question receives a warning from the European Commission. “If the State does not put an end to the situation of excessive deficit within the time allowed, the Council can impose sanctions: deposit with the ECB (European Central Bank), which can become a fine (from 0.2 to 0 .5% of the GDP of the State in question) if the excessive deficit is not corrected“, specifies the site vie-publique.fr.

Another rule provides that the public debt of States does not exceed the ceiling of 60% of GDP, but the Commission had already announced last March that this rule would still not be applied in 2023. Countries like Italy, whose debt represents 160% of GDP, or Greece, where it exceeds 200%, are not in a position to apply such a rule. “This provides leeway for national budgetary policies to react quickly if necessary”, abounded Valdis Dombrovskis. This is particularly the case of France for which this pause of the Maastricht rules has made it possible to fully implement its policy of “whatever the cost”.

Call for rigor

The Vice-President of the European Commission, however, calls for rigor. “Fiscal policy will need to be prudent in 2023, controlling the growth of government-funded primary current expenditure”, underlined the Commission. Fiscal policy must be ready to adapt to changing circumstances and Brussels will provide further recommendations after the summer.

Stagflation in the euro zone: no threat, assures the ECB

Last January, the former Minister of Public Accounts, Olivier Dussopt, announced that the French deficit would reach 7% of GDP for the year 2021. This result, far from the objective of the PSC, is however better than that feared at the beginning of the year, which was counting on a deficit of around 8%. In detail, the State deficit would amount to 171 billion euros, i.e. “nearly 34.5 billion less compared to our last forecasts“. As for that of Social Security, it would be around 25 billion over the financial year.

Growth outlook downgraded

But if Brussels has agreed to be conciliatory regarding the budgetary rigor of the Member States, it is because the European institution was betting on solid growth. A bet that promised to be a winner at the start of 2022 with GDP growth in the euro zone never so high since the start of these statistics in 1996 by Eurostat. In 2021, GDP thus jumped by 5.2% in the whole of the European Union. A historic figure, higher than the previous forecast (5%), which testified to the rapid rebound of the European economy after the no less historic economic plunge linked to the Covid-19 pandemic: in 2020, GDP had fallen -6.4% in the 19 countries sharing the single currency and -5.9% within the EU.

But the outbreak of war in Ukraine has darkened optimism. On May 16, the European Commission published new projections for 2022 betting on a GDP increase of 2.7% in 2022 and 2.3% in 2023 within the European Union (EU) as well as in the euro. The European executive was betting three months earlier on growth of 4% in 2022 and 2.8% in 2023.

For its part, Germany judged that the situation was not serious enough to justify a one-year extension of the safeguard clause. His finance minister, Christian Lindner, said his country would not apply it. “From our point of view, the data is not such that a suspension of the Stability Pact rules is absolutely necessary”he said. “Germany, in any case, will have no use for it.”

(With AFP and Reuters)