The impact of the pandemic

Brussels proposes to keep deficit rules suspended until 2023

The Commission sees the need to make the return to the Stability Pact as flexible as possible depending on the recovery of each country

2 min
The Vice-President for Economic Affairs, Nadia Calviño, with the Commissioner for Economic Affairs, Paolo Gentiloni.

BrusselsThe economy of the European Union will not recover the levels of 2019 (before the outbreak of the pandemic) until mid-2022. For this reason, and given the uncertainty of the context, the European Commission has proposed on Wednesday that the fiscal rules (the limit of deficit and public debt) continue to be suspended until 2023. Brussels activated the suspension clause of this fiscal straitjacket at the beginning of the pandemic, to give free rein to public spending in the face of the lockdown measures that have quarantined the economies of European partners.

"Current indicators suggest that the sunset clause should be continued in 2022 and deactivated in 2023", the communication of the Community executive concludes. Yesterday's proposal is a proposal that marks the path of a discussion scheduled for the spring of this year and which countries like Spain want to take advantage of to push for a reform of the rules. In addition, the European Commission believes that the return to the fiscal rules must be approached with the maximum possible flexibility, depending on how long it takes for each country to return to their pre-pandemic situation. In some states this recovery is expected to take place in 2022, but in Spain the forecast is for 2023.

This means that the Stability and Growth Pact, which was born in 1997 to ensure that the public deficit would not skyrocket once the single currency was adopted, is suspended. Since its inception, the law has had an exceptionality clause that allows it to be suspended in the event of "unusual events", and the coronavirus pandemic allowed this clause to be used for the first time. The recession caused by the coronavirus meant that no one questioned the need to press the emergency button, but now it remains to be seen whether there is a consensus to keep the Stability Pact suspended until 2022.

Time to reform fiscal rules

Even before the pandemic, when European economic growth began to slow, the need to reform fiscal rules was already on the table, and the arrival of the coronavirus made the debate even more urgent. The European Commission, with Italy's Paolo Gentiloni at the helm of the economic portfolio, believes that the rules preventing the deficit from exceeding 3% of GDP and public debt from exceeding 60% must be adapted to a reality that is very different after the pandemic. If before the pandemic there were hardly any European partners with a deficit of more than 3% (in the case of debt the situation is very different), Brussels expects the joint deficit of the EU states to exceed 9% by the end of this year and the debt to be above 110% of GDP.

In February, Gentiloni already admitted that "the rules are perceived as too complex and difficult to communicate". The pandora's box of the reform, then, had already been opened with the aim of stimulating economic growth, but the epidemic arrived and it had not yet materialized, which is why Brussels and some governments believe that with the pandemic the time has come to address this amendment.