European Semester Spring Package: Questions and answers

(Source: European Commission)

What is included in this year’s European Semester Spring Package?

The European Semester Spring Package includes:

How does this year’s package compare to previous European Semester Spring Packages?

The European Semester and the new Recovery and Resilience Facility are intrinsically linked. Given that the two processes overlap, it was announced in 2021 Annual Sustainable Growth Strategy last autumn that the Commission would temporarily adapt the European Semester to take into account the launch of the Recovery and Resilience Facility (RRF).

This year’s Spring Package focuses on providing fiscal guidance to Member States for 2022 and the medium term as they continue the process of gradually reopening their economies.

The recovery and resilience plans are the main reference document for Member States’ forward-looking policy initiatives. They set out the investments and reforms that will be financed by the RRF. The Commission is currently assessing the plans it has already received. It continues to engage intensively with the remaining Member States to help them deliver high quality plans. The Commission will present the first proposals for Council Implementing Decisions based on assessments of the plans we have received by end April before the end of June. Further proposals for Council Implementing Decisions will follow in the course of July. They will be accompanied by analytical staff working documents assessing the substance of the plans. These documents will replace the usual country reports.

The Commission also continued its surveillance under the Macroeconomic Imbalance Procedure, with a focus on how existing imbalances have evolved and on emerging risks due to the pandemic.

What is the Commission’s assessment on whether the general escape clause should remain activated?

The Communication on fiscal policy presented in March 2021 set out the Commission’s considerations for how the decision on the deactivation of the clause or its continued activation should be taken. It provided that the decision should be taken following an overall assessment of the state of the economy based on quantitative criteria. A key quantitative criterion in that regard is the level of economic activity in the EU or the euro area compared to pre-crisis levels (end-2019).

Based on the Commission’s Spring 2021 Economic Forecast, pre-crisis economic activity is projected to be reached around the fourth quarter of 2021 in the EU as a whole and the first quarter of 2022 in the euro area. On this basis, the Commission considers that the conditions are met to continue to apply the clause in 2022 and is expecting to deactivate it as of 2023.

Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.

What fiscal guidance is the Commission providing to Member States for the period ahead?

The Commission’s guidance provides that the fiscal stance, stemming from national budgets and the Recovery and Resilience Facility, should remain supportive in 2022. The expenditure financed by the RRF will provide a substantial fiscal impulse in 2022 and the coming years. The expenditure financed by RRF grants makes it possible to fund high-quality investment projects and cover the costs of reforms that strengthen potential growth and employment without giving rise to higher deficits and debt levels.

In this context, Member States with low levels of debt should pursue a supportive fiscal stance, including by making full use of the Recovery and Resilience Facility. Member States with high debt should use the RRF to finance additional investment to support the recovery while pursuing a prudent fiscal policy. All Member States should preserve nationally financed investment. At the same time, the growth of nationally financed current expenditure should be kept under control, and be limited for Member States with high debt.

For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. Moreover, all Member States should pay particular attention to the composition of public finance, both on the revenue and expenditure side of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery.

When economic conditions allow, Member States should pursue policies to achieve a prudent medium-term fiscal position and ensure fiscal sustainability in the medium term. At the same time, Member States should enhance investment to boost their growth potential.

In view of the still exceptionally high degree of uncertainty, including regarding the impact on growth potential of the crisis and the reforms and investments implemented with the support of the Recovery and Resilience Facility, this year’s guidance remains predominantly qualitative. More precise quantified guidance for the later years will be provided in 2022, provided that the degree of uncertainty has sufficiently declined by then.

What are the main findings of the Article 126(3) report?

The activation of the general escape clause does not suspend the procedures under the Stability and Growth Pact. The Commission has, therefore, adopted a report under Article 126(3) of the Treaty on the Functioning of the EU (TFEU) for all Member States except Romania, which is already in the corrective arm of the Pact. The purpose of this report is to assess Member States’ compliance with the deficit and debt criteria of the Treaty.

The Commission has taken into account the high uncertainty, the agreed fiscal policy response to the COVID-19 crisis and the Council’s recommendations for 2021.

The analysis suggests that the deficit criterion is fulfilled by three Member States (Bulgaria, Denmark and Sweden) and not fulfilled by 23 Member States. The debt criterion is not fulfilled by 13 Member States (Belgium, Germany, Greece, Spain, France, Croatia, Italy, Cyprus, Hungary, Austria, Portugal, Slovenia and Finland).

The Commission considers that, at this stage, a decision on whether to place Member States under the Excessive Deficit Procedure should not be taken. The Commission will reassess Member States’ budgetary situation on the basis of the Autumn 2021 Economic Forecast and the Draft Budgetary Plans that will be submitted by euro area Member States in October 2021.

Does the Commission have any concerns regarding Member States’ fiscal sustainability?

Safeguarding fiscal sustainability is a key objective of the EU’s fiscal surveillance framework. The recommended fiscal guidance takes this priority into account.

The fiscal support provided by the Member States helped to avoid a steeper drop in GDP, which would have led to a more significant increase in the debt-to-GDP ratio. Without government intervention, the COVID-19 pandemic would have had deeper and longer lasting scarring on our economies which would have undermined fiscal sustainability.

According to the guidance, the fiscal stance, stemming from national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022.

Given the expectation of economic activity gradually returning to normal in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022, taking into account the state of the recovery, different fiscal positions and risks and the need to reduce economic, social and territorial divergences.

When economic conditions allow, Member States should pursue a policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, Member States should enhance investment to boost growth potential.

An updated analysis of the debt sustainability of each Member State is attached to the recommendations in the statistical annex.

How does the Commission assess the recent evolution of macroeconomic imbalances?

In general, after the gradual correction in previous years, the COVID-19 pandemic has been a setback in the reduction in macroeconomic imbalances observed over the past decade.

Debt-to-GDP ratios increased in 2020 due to lower GDP levels and the significant increase in borrowing with the aim of cushioning the socio-economic fallout of the pandemic. The lower GDP had an automatic impact on the ratios, through the decrease in the denominator.

Temporary moratoria on debt repayment by corporations and households have kept debts performing while reducing the risk of liquidity shortages. Debt dynamics can become more challenging going forward but are expected to improve with the recovery. 

External accounts have been mostly stable during the COVID-19 pandemic. The exceptions have been in those Member States most exposed to falling foreign tourism, where current accounts worsened in 2020 and may not fully recover this year or next. In parallel, large current account surpluses remain persistent, as does the current account surplus for the euro area as a whole.

The continued expansion of the pre-crisis years led to overheating pressures reflected in cost competitiveness losses and strong house price growth. During the COVID-19 crisis, cost competitiveness losses have softened, but pressures from house price growth less so.

What are the main findings of the in-depth reviews?

The 12 Member States covered by an in-depth reviews are the same that were identified with imbalances in the last cycle. These are Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Romania, Spain, and Sweden. At this stage, a revision of the classification of imbalances does not appear warranted.

Cyprus, Greece and Italy continue to experience excessive imbalances linked to high government debts and high shares of non-performing loans despite continued and significant progress in this area. Cyprus and Greece combine this with high levels of external debt and, in Cyprus, also with high levels of private debt. Ensuring productivity and competitiveness gains remains important to drive debt deleveraging.

Imbalances in Croatia, Ireland, Portugal, and Spain combine high private, government and external debts, while in France government and private debt levels continue to rise. Ensuring productivity and competitiveness gains remains important for all these Member States.

In Romania, competitiveness losses are abating, but the large current account deficit persists, and fiscal trends need to be firmly reversed after years of deterioration.

Germany and the Netherlands record persistently large current account surpluses, compounded by high levels of private debt in the Netherlands.

In Sweden, the high house prices are not moderating while high and increasing levels of household debt remain a concern.

The implementation of investments and reforms within the RRF is also expected to help in reducing imbalances.

Why is the Commission recommending a revised adjustment path for Romania to correct its excessive deficit?

Romania is under the excessive deficit procedure since 3 April 2020 based on pre-pandemic fiscal policies that led to an excessive deficit already in 2019.

The Council Recommendation of 3 April 2020 asked Romania to correct the excessive deficit situation by 2022. However, given the severe impact of the COVID-19 pandemic, that recommendation no longer provides a relevant basis for fiscal policy guidance for Romania.

The new recommendation takes the changed economic environment into account, recognising the need to support economic recovery through investment, while ensuring fiscal sustainability. It incorporates the budgetary developments in 2020, the adopted 2021 budget and the new medium-term budgetary strategy of the Romanian government.

The revised recommendation requires the correction of the excessive deficit by Romania by 2024. In our view, it strikes a good balance between supporting the economic recovery and fiscal consolidation.

What are the main findings of the enhanced surveillance report for Greece?

The tenth enhanced surveillance report for Greece finds that the country has taken the necessary actions to achieve its due specific commitments, despite the challenging circumstances caused by the pandemic.

The Greek authorities have delivered a number of important reforms, including in the areas that will be key to managing the long-run repercussions from the current economic crisis and strengthening the capacity of the public administration to successfully implement Greece’s recovery and resilience plan.

The European institutions welcome the close and constructive engagement in all areas and encourage the authorities to keep up the momentum and, where necessary, reinforce the efforts to remedy the delays partly caused by the pandemic, in particular as concerns the financial sector reforms.

What are the main findings of the post-programme reports for Cyprus, Ireland, Spain, and Portugal?

For each of these Member States, the reports assess the capacity to repay the debt incurred during their financial assistance programmes. In each case this assessment is positive.

The Cypriot economy contracted sharply in 2020 due to the Covid-19 pandemic and the related lockdown measures. A gradual recovery of the economy is expected for 2021 and 2022, nevertheless, downside risks to the growth and fiscal outlook are significant. Public finances are expected to gradually improve. While the effects of the pandemic are also seen in the financial sector, banks made further progress in reducing non-performing loans. The take-up of last year’s moratorium on loans was high. While early signs were encouraging following the lifting of the 2020 moratorium, the outlook is uncertain with respect to the new inflows of NPLs. Throughout 2020 the government built a significant cash buffer in order to support the economy and address possible adverse scenarios. Through its bond issuances, Cyprus demonstrated stable market access and favourable financing conditions.

In Ireland, the COVID-19 pandemic had a smaller impact on GDP than elsewhere in Europe due to the strong performance of multinational corporations registered there. The impact on local firms and labour market nevertheless required government support, which resulted into a budget deficit of 5.0% of GDP and higher public debt. A deficit is also expected in 2021, while the economy is set to grow. The impact on the financial sector has been contained so far and capital and liquidity positions of Irish banks remain strong. Some of the adverse effects of the pandemic may emerge once general support measures are phased out.

Notwithstanding the large negative impact of COVID-19, the Portuguese economy is likely to return to its pre-crisis level in mid-2022, roughly half a year earlier than the expectation in the previous post-programme surveillance review. The fiscal position deteriorated substantially in 2020 but is set to improve along with the expected economic recovery. The banking sector has remained resilient, helped by economic support measures and particularly the moratoria on debt repayments. The share of non-performing loans even fell in 2020, but the actual performance will only become clear once the moratoria expire.

In the case of Spain, while the fiscal cost has been considerable, measures adopted by the authorities to support corporates and households have helped mitigate the impact of the crisis on the banking sector, that had entered the COVID-19 crisis in much better shape than in past crisis episodes, benefitting from better asset quality, capitalisation and liquidity position.

What is included in the proposal on guidelines for the employment policies?

The Commission has adopted a proposal on the Council Decision on guidelines for the employment policies of the Member States for 2021, on the basis of Art. 148 (2) TFEU requiring these guidelines to be drawn up every year. The Employment Guidelines present common priorities for national employment policies and provide the legal basis for Country-Specific Recommendations in the employment and social areas.

This year’s Commission proposal reconfirms the structural update of the Employment Guidelines done in October 2020 to integrate the economic narrative of the Annual Sustainable Growth Strategy 2021, notably the environmental sustainability and digital dimensions, reflecting the Stronger Social Europe for Just Transitions Communication and integrating the UN Sustainable Development Goals (SDGs), as well as to address the consequences of the COVID-19 crisis.

The recitals of the Guidelines were updated to reflect the Porto Social Summit conclusions, making reference to the European Pillar of Social Rights as a fundamental element of the recovery and stressing that the social dimension has always been at the core of the European social market economy. The updated recitals also refer to the new EU headline targets on jobs, skills and poverty reduction by 2030 and to the Commission recommendation on Effective Active Support to Employment (EASE).

Further Information

Press release: The European Semester Spring 2021 Package

The European Semester 2021 Spring Package – Documents

Communication on the Commission recommendations

Commission recommendations

Report under Article 126(3)

Employment guidelines for 2021

Tenth enhanced surveillance report for Greece

Post-programme surveillance report for Cyprus

Post-programme surveillance report for Ireland

Post-programme surveillance report for Spain

Post-programme surveillance report for Portugal

The European Semester

Communication on fiscal policy response

Spring 2021 Economic Forecast

Stability and Growth Pact

Macroeconomic imbalance procedure

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