The economic rebound led to a mood of cautious optimism among EU Finance ministers at a two-day informal meeting in Brdo, Slovenia, that ended on Friday.
The meeting, held ahead of the resumption of an extremely sensitive discussion on the future of budgetary rules in the euro zone, was devoted to post-COVID economic recovery.
The European Commission is scheduled to relaunch public consultations soon on the rules of the Stability and Growth Pact, the straitjacket that euro zone countries set themselves to coordinate their national budgetary and economic policies and avoid excessive budget deficits.
These ceilings are that budget deficits must not exceed 3% of gross domestic product (GDP), while the public debt must not exceed 60%. They were suspended in the Spring of 2020, soon after the novel Coronavirus pandemic broke out in Europe, to allow public authorities to provide massive support for economic sectors hit by lockdowns and business closures.
This suspension remains in effect until the end of 2022. The EU’s 27 members need to reach agreement before 2023 on new budget rules, since the current ones are outdated: average public debt among the euro-zone countries is now 100%.
“This is sustainable, but we need to reduce this level gradually,” European Commissioner for Economic affairs Pablo Gentilioni, said. “We need joint rules; the idea will be to have rules that support sustainable growth.”
For European Central Bank (BCE) President Christine Lagarde, debt levels will not be the only criteria to be taken into consideration. Attention will also need to be paid to the degree to which the debt has been used effectively and its cost at a time of historically low interest rates, she said.
There is no guarantee the 27 will reach an agreement by 2023. The Euro zone has been divided in the past between the “frugals”- a handful of Northern countries with healthier finances, led by the Netherlands – and countries requiring the most help, such as Italy, Spain and Greece. The former accuse the latter of laxity, while the latter accuse the former of being selfishly tightfisted.
“The issue today is not just knowing how to limit budgets but also how to invest in the future,” Belgian Finance Minister Vincent Van Peteghem stressed. “That will be the discussion: how to ensure a sustainable budget, a sustainable debt rate – which is necessary to face up to future crises – while preparing for the future by increasing our investment level.”
While a consensus needs to be built around the new budget rules, the discussion cannot boil down to a new chapter of the debates of the past 10 years, Paolo Gentiloni said, pointing to the impact of the pandemic and the need for a green transition. In any event, he added, if the 27 fail to reach a consensus before the end of next year, ways will be found to manage the problem.
The EU finance leaders meeting in Brdo did not hide their satisfaction at the economic recovery now under way. Eurogroup Chairman Paschal Donohoe (Ireland) noted that the efforts by various bodies such as the ECB and the Commission had worked, as had inter-State coordination, thus proving the initial fears wrong.
Heightened recovery prospects – reviewed upward to 5% for the Euro zone this year and 1% more than forecast in March – low numbers of bankruptcies and high vaccination levels are not the only causes for satisfaction.
The director of the European Stabilisation Mechanism, Klaus Regling, now agreed that investing in the United States was now riskier than investing in Europe.
For his part, Vincent Van Peteghem took pride in the fact that “in Belgium, we have strong economic growth, and the vaccination rate is very high.”
However, there is no room for complacency, Paschal Donohue cautioned. There are still risks, such as those related to the Delta variant, inflation or certain sectors, he noted, adding that economies would continue to receive support, but the trend will be towards a more global approach and more targeted support.
Bruno Le Maire (France) listed the hospitality industry as a sector in need of attention, while Van Peteghem drew attention to access to the real estate market for young people. “The young generations also need to benefit from the current resumption,” he stressed.
Care needs to be taken to make sure the recovery is not just a rebound but that it is continuous, Ms Lagarde warned.