EU Commission extends borrowing curbs in 2023

EU debt rules limit member countries from running a deficit upwards of three percent and limit the debt to GDP-ratio to 60 percent.

The EU suspended tight fiscal rules at the start of the pandemic, which have been under heavy criticism for their inflexibility during the eurocrisis, to allow governments to offset the economic fallout of Covid-19.

But the EU faces a "mountain of investment" in the transition to a digitised green economy that is not reliant on Russian gas imports and needs more private and public spending to recover from the pandemic.

To support an economy that faces "high uncertainty and strong downside risks," Gentillioni said, member countries should implement already-approved pandemic recovery measures as soon as possible.

"We need to invest €520bn a year until 2030 in the green transition alone," he said.

A further €210bn is earmarked for the commission's RePowerEU strategy to quit Russian gas by 2027, which member states can pay for out of the €225bn in loans still available under the EU's €750bn recovery and resilience facility.

While the commission highlighted more investment, the commission's vice-president Valdis Dombrovskis also signalled that individual member states should move towards more "prudent" expenditure.

"Since growth remains positive and inflation high, a broad-based impulse to the economy does not appear to be warranted," he said.

Instead, spending should be "targeted" at green transition and strategic autonomy, he said.

The commission has kicked off on how to reform the bloc's fiscal rules twice already, but the debate has been postponed once because of the pandemic and now because of the Russian invasion of Ukraine.

According to Dombrovskis, a fresh debate is expected to start "in a couple of months", but he added that the commission reserves the right to suspend so-called excessive deficit procedures to limit countries' indebtedness for the next year, with 17 countries currently in breach of debt-deficit criteria.

Monetary tightening

In a blog post on Monday, European Central Bank president Christine Lagarde wrote that the eurozone will likely "exit negative interest rates by the end of the third quarter."

This will increase the cost of government borrowing, with investors in government bonds already charging higher interest rates across the bloc.

With real rates rising, the cost of the "mountain of investments" governments are expected to make in the coming months will increase.

"Households are the ones suffering most," Lagarde wrote.

Real wages have been on the decline for the last two quarters and are expected to contract "even faster" during the rest of this year.

"Some countries may enter a technical recession for a few quarters, but this is not the general assessment for the EU economy [as a whole]," Gentilioni said.

On Sunday, German finance minister Christian Lindner urged the EU to rein in public spending ahead of Monday's Eurogroup meeting.

But economists warned against austerity measures on the cusp of a recession.

"What could…go wrong given the current economic downturn and fiscal needs to compensate for rising inflation? Have we learned [so] little from the economic and political experience with austerity since 2010," economist Phillipp Heimberger tweeted on Monday.