EU Likely to Continue Suspension of Bloc’s Debt Rules in 2022

The European Union’s executive arm is likely to suspend the bloc’s debt rules through next year as persistent lockdowns and sluggish vaccine rollouts dampen the region’s economic recovery.

The European Commission will outline new parameters on Wednesday for deciding whether to seize or prolong a suspension of the EU’s spending limits in May, according to two officials familiar with the plan. The decision comes a year after the commission first scrapped the rules as governments sought to cushion the blow of the pandemic with extraordinary levels of support.

A resolution to hold off on restoring the rules is yet another sign that EU economies are likely to take a gradual approach in phasing out such support, even as public finances have deteriorated across the board.

While its official decision isn’t due for another two months, the commission will say that indications suggest the rules shouldn’t be reintroduced until 2023, said the officials, who asked not to be identified because the decision is private. Reinstating the rules would require the EU economy to return to 2019 levels, an unlikely scenario as restrictions persist amid the rise of new covid variants and relatively slow inoculation campaigns.

The draft is still being finalized and could be subject to changes, according to the officials.

Slow Recovery

The euro-area economy contracted by 6.8% last year and the commission forecasts growth of 3.8% for this year, with predictions hinging on virus containment measures starting to be eased toward the end of the second quarter.

The EU is broadly projected to reach its pre-pandemic economic levels in mid-2022, but the situation will vary greatly across member states, with economies like Spain and Italy not seen recovering as quickly. The commission is expected to say that even when reinstated, the rules should also include greater flexibility for countries that have not yet reached their pre-pandemic levels.

The discussion on prolonging the suspension of the rules comes as the bloc is beginning to debate how its members can start shifting from blanket support measures for their business and workers to more targeted ones. As governments look to wean firms off liquidity support, they are preparing for a possible surge in bankruptcies and their subsequent impact on bad loans.

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.

©2021 Bloomberg L.P.

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