Governments Can Keep Fiscal Stimulus Flowing, EU Commission Says

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A general waiver allowing European Union member states to spend their way out of the pandemic-induced recession will stay in place through next year, the bloc’s executive arm said, allowing governments to keep supporting demand even as their economies recover.

Budget deficits will increase in most EU member states in 2021 and remain above the nominal threshold of 3% of gross domestic product prescribed under the bloc’s rules in all of them except Denmark and Luxembourg, the European Commission said in policy recommendations released on Wednesday. A premature withdrawal of fiscal support would hinder recovery, the commission said, and so there will be no targets for deficit reduction in 2022.

“The recovery remains uneven and uncertainty is still high, so economic policy must remain supportive in both 2021 and 2022,” EU economy chief Paolo Gentiloni said in a statement. “Our message today is that all countries should also preserve nationally financed investment.”

The EU suspended its fiscal rules, which provide for sanctions for excessive borrowing, after the virus triggered the steepest recession in living memory. Longstanding European taboos, such as jointly backed debt issuance, have been broken, and governments have started discussing a broader overhaul to simplify their fiscal rulebook.

The commission told member states on Wednesday to maintain “prudent” fiscal support to their economies in 2022, even as it expects one off measures introduced during the pandemic to be wound down as of next year. It is still difficult to assess with certainty the impact of the public spending spree on the finances of highly indebted EU member states, the commission said.

“We are encouraging member states to maintain supportive fiscal policies this year and next, preserving public investment,” Commission Vice President Valdis Dombrovskis said. “A sound mix of expenditure -- focused on investments while keeping other expenses under control -- will facilitate the return to more prudent positions in the medium-term, which will be especially important for high-debt countries.”

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