EU’s Economy Chief Calls for New Fiscal Rules to Aid Recovery

The European Union’s fiscal rules should be adapted to allow for more spending to boost growth as countries struggle to pull their economies out of pandemic-induced recessions, according to the bloc’s top economic official.

EU Economic Affairs Commissioner Paolo Gentiloni, speaking at the European Fiscal Board’s annual conference on Friday, reiterated calls to withdraw public support very gradually in order to avoid a sharp rise in insolvencies. But he added that reducing debt loads will remain warranted once the crisis has passed.

EU’s Economy Chief Calls for New Fiscal Rules to Aid Recovery

The euro-area economy contracted by 6.8% last year and the European 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 bloc is beginning to discuss how they can start shifting from blanket support measures for their business and workers to more targeted ones.

“Given the context of a very deep, uneven recession and high uncertainty, I believe it would be wiser to err on the side of doing more, not less,” Gentiloni said on Friday. “With the previous crisis we saw how costly it was to turn off the taps too soon.”

Changing the Rulebook

The bloc’s fiscal rules were suspended when the coronavirus hit, and few believe they can ever return in the same form. They require countries to aim for budget deficits of less than 3% and debt burdens below 60% of gross domestic product. The commission expects those figures to be more than 6% and 100% for the euro area this year.

The rules were already 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 will likely resume in the second half of this year.

The new framework should include a special treatment for growth-enhancing expenditure, Gentiloni said, arguing that the composition of debt -- and whether it includes spending on key areas such as infrastructure and education -- should matter when assessing its sustainability.

“Our fiscal rules should be adapted to improve the composition of public finances and make sure that any new debt is good debt,” he said.

Still, reducing debt loads is likely to remain central to any new framework. While overly strict rules could lead to a “self-defeating adjustment,” Gentiloni said a “credible mechanism to steer debt onto a gradual and steady downward trajectory remains warranted.”

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