26th Sep 2021

EU suspends deficit rule to end of 2022 to help with crisis

  • "We continue to apply the general escape clause next year, but no longer in 2023 - it means that for the next year we are not setting quantitative budget deficit targets," commission vice-president Valdis Dombrovskis said (Photo: European Commission)

The EU will keep the deficit rules suspended throughout next year as well as for 2021, the EU Commission said on Wednesday (2 June), to allow governments to keep supporting their pandemic-stricken economies.

Deficits will increase in most member states in 2021, with almost all EU-27 countries' deficits remaining above the EU threshold of three percent, except for Denmark and Luxembourg.

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Thirteen member states are expected to have deficits higher then three percent of GDP next year.

The commission, publishing its policy recommendations to EU governments, warned that premature withdrawal of fiscal support could derail the recovery.

The commission also told member states to make full use of the EU's forthcoming €800bn recovery funding.

"We continue to apply the general escape clause next year but no longer in 2023, it means that for the next year we are not setting quantitative budget deficit targets," commission vice-president Valdis Dombrovskis told reporters.

"The overall message is that we should continue to support the economy so fiscal policy should be supportive both this year and next, and we should avoid premature withdrawal of the fiscal support," he added.

The commission said countries with a high ratio of debt compared to the GDP should be prudent, to not compromise their debt sustainability.

Rethinking taboos

Waving the deficit rules for another year shows how the steepest economic recession since the second world war has triggered the EU to rethink longstanding taboos.

Instead of the austerity policy followed during the 2008-09 crisis, the EU has - temporarily - decided to issue debt jointly to finance the recovery fund, suspend deficit and debt rules, which could lead to rethink of those rules for after the pandemic.

The commission expects the that EU economy will reach pre-pandemic level at the end of 2022.

The EU executive said the scale of fiscal support provided by member states in 2020 was 6.6 percent of GDP for the whole bloc, compared to 2019, and will be just above seven percent in 2021, and 3.4 percent in 2022.

The recovery fund should amount to 0.4 percent of the GDP this year and a 0.5 percent support next year.

Money from the recovery fund should reach member states during the summer.

The commission is currently assessing the national plans which member states submitted on how they plan to use the recovery fund available to them.

The EU executive is expected to finish the analysis by the end of June, and the council of member states could take decisions on the disbursement of funds in July.

First recovery euros could be paid out in July

Economy commissioner Paolo Gentoloni said the real challenge is whether member states can stick to their national plans and timelines. However, more than a dozen EU countries still need to ratify legislation to start the funding.

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