(Source: European Commission)
Remarks by Executive Vice-President Dombrovskis
Good morning, ladies and gentlemen.
Russia’s brutal invasion of Ukraine continues to shock the world. Europe’s geopolitical and economic landscape has changed dramatically.
This aggression is pressuring supply chains and driving inflation higher. It has created enormous uncertainty.
People have valid concerns about their rising living costs and ability to pay higher energy bills.
The EU economy has been hit hard.
Still, we had a good starting point. Let us recall that before February 24, the EU economy was on a strong growth path.
All signs were pointing to a good recovery from the COVID-19 crisis, following our massive, coordinated response to support people and businesses to get through the economic hardship of various lockdowns.
The Recovery and Resilience Facility is helping too.
Its implementation is progressing fast.
In terms of RRF disbursements, we have now paid out around €100 billion to Member States so they can carry out their reforms and investments.
Overall, the EU economy is proving resilient, despite the ramifications and risks brought by Russia’s invasion of Ukraine.
We still expect growth in 2022 and 2023.
But it will be a lot more subdued that previously expected.
From the economic perspective, this is a critical time when it is paramount for the EU to coordinate policies effectively.
Our compass for doing so is the European Semester.
It will help us to address these current challenges, prepare to face new ones and weather this storm.
So what is the focus of today’s guidance?
To start with, we must stay on track in equipping our economies for the future – by making them more resilient, and by making the green and digital transitions happen.
One key lesson we have learned from this war is that we urgently need to end the EU’s reliance on Russian fossil fuels.
Our response is the REPowerEU plan.
It will diversify the EU’s energy mix, moving away from Russian natural gas. It will help to accelerate the substitution of fossil fuels with renewable energy and give the EU a more reliable, secure and sustainable energy supply.
Today’s recommendations translate REPowerEU objectives into reforms and investments for Member States.
They will be the basis for Member States to propose a dedicated REPowerEU chapter in their national recovery plan.
Accelerating our green transition can only succeed if it is done in a way that is socially fair and inclusive.
This year, we propose to update our employment guidance with a strong focus on making the green transition socially fair, as well as on dealing with the social impact of Russia’s invasion of Ukraine.
- supporting people who flee the war, in terms of labour market access and social integration;
- supporting vulnerable households given the increase in energy prices and cost of living;
- addressing labour shortages and skills mismatches through skills and learning policies;
- meeting EU targets on employment, skills and poverty, as agreed at the Porto Summit.
We are facing heightened uncertainty and strong downside risks to the outlook, so we propose maintaining the general escape clause in 2023, and deactivating it as of 2024.
This will provide the space for national fiscal policies to react quickly, if and when needed.
However, to be clear: extending the clause’s activation does not suspend the Stability and Growth Pact.
So it does not mean ‘free for all’.
Since growth remains positive and inflation is high, a broad-based fiscal impulse to the economy in 2023 does not appear to be warranted.
Actually, today’s guidance calls for Member States to move towards prudent fiscal policies.
All Member States should promote and expand public investment, for the green and digital transitions and for energy security. However, higher investment should be combined with strict control of other – current – expenditure.
For low and medium-debt Member States, current expenditure should entail a neutral fiscal stance.
Current expenditure in high-debt Member States should increase less than medium-term potential economic growth. We provide exact figures in the recitals that go with today’s recommendations.
At the same time, governments may continue to provide temporary and targeted support to those that are most vulnerable to energy price rises – and also to people fleeing Ukraine.
The Commission does not intend to open new excessive deficit procedures at this stage.
However, we will reassess compliance with the deficit and debt criteria in the autumn and again next spring.
We will pay particular attention to Member States’ compliance with today’s recommendations.
At present, Romania is the only Member State under an excessive deficit procedure, based on developments before the pandemic.
For last year, Romania’s deficit is in line with what was recommended by the Council.
So we are keeping the procedure in abeyance.
However, since there are substantial risks for the next year, more effort still will be needed to reach the targets.
Turning to macroeconomic imbalances:
Based on the 12 Member States assessed as part of in-depth reviews, we can say that overall, macroeconomic imbalances are gradually falling back.
Private and public debt levels are declining from high levels.
Current accounts are rebalancing.
But the impact of COVID-19 is not yet fully absorbed.
And new risks are increasing.
House prices, for example, continue to rise in a number of Member States.
In all, for 10 Member States we reconfirm last year’s assessment:
Greece, Italy, and Cyprus continue to experience excessive imbalances.
Germany, Spain, France, the Netherlands, Portugal, Romania and Sweden continue to experience imbalances.
I am pleased to announce that Ireland and Croatia are no longer experiencing imbalances.
An extra word on Croatia, where debt ratios have declined significantly over the years and show a strong downward trend.
This sends an important signal ahead of the convergence report that we will present on 1 June. As you know, Croatia aims to adopt the euro as its currency on January 1, 2023.
Lastly, on Greece:
Today, the Commission adopted the fourteenth report under enhanced surveillance. It finds that Greece has taken the steps needed to achieve its agreed commitments.
We welcome this progress, which Greece has made despite the economic hardship caused by the pandemic and by the impact of Russia’s invasion of Ukraine.
Greece’s success in meeting the bulk of the policy commitments has improved the resilience of its economy.
The Eurogroup will now discuss the report, which could serve as a basis for releasing the next set of policy-contingent debt measures worth €748 million.
Thank you and I will now pass the floor to Paolo.
Remarks by Commissioner Gentiloni
Good morning. We all know that our economy is living through its second external shock in two years. And that Russia’s invasion is not only causing not only untold human suffering, which is our main concern, but also a severe shock to energy and food markets and industrial supply chains: further fuelling inflation and weakening confidence.
A week ago I presented our Spring Economic Forecast, which provides the economic underpinning for the policy recommendations we are presenting today. As I underlined then, while our baseline is for GDP growth of 2.7% this year, around three quarters of that figure is due to a statistical carry-over from the very strong recovery of our economies in 2021. Within-year growth is set to be much lower in 2022 – only 0.8%.
Annual inflation in the EU is projected to reach 6.8% this year, something that has never before occurred in this century, before declining to 3.2% in 2023.
Moreover, the outlook is subject to downside risks and very high uncertainty, which is why we presented two more negative scenarios in our forecast, both of which would see within-year growth in negative territory and inflation reaching still higher levels.
Taking all of this into account, it is evident that the Union is not yet out of a period of severe economic downturn.
And this is why we have concluded in favour of extending the general escape clause of the Stability and Growth Pact through 2023.
The extension of the general escape clause will provide the space for national fiscal policies to react quickly to evolving circumstances in these highly unpredictable times.
I would like to underline two key messages on the general escape clause.
First, we are far from economic normality.
Second, we are not proposing a return to unlimited spending.
Overall, the general escape clause will help Member States continue to transition from the universal support provided during the pandemic to more targeted measures to mitigate the impact of the energy crisis and to assist those fleeing the war.
National fiscal policies should combine higher investment with controlling the growth in current expenditure, which is of course particularly important for high-debt countries that are asked to ensure a prudent fiscal policy in 2023.
We collectively face a mountain of investments in the coming years, which will require the mobilisation first of all of the private but also of the public sector: not only for the green and digital transition, but also to strengthen our strategic autonomy, our common defence, our energy independence.
We have previously estimated additional investments needs of €650 billion per year up to 2030 for the twin transition, of which €520 billion for the green transition alone. And this is likely to be at the lower end of the actual needs, as a result of the need to frontload energy investments in the wake of the Russian invasion of Ukraine. As we indicated last week, delivering the REPowerEU objectives will require an additional investment of €210 billion between now and 2027.
So fiscal policy should expand public investment for the green and digital transition and for energy security. Investments require not only financing but also reforms to ensure their swift and effective delivery. And more broadly, to embed them in a context of inclusive, sustainable economic development.
NextGenerationEU, and in particular its Recovery and Resilience Facility, remains our most powerful tool for delivering these investments and reforms, which are designed at national level and address agreed common European priorities. That’s why the full and timely implementation of national recovery and resilience plans is so important.
You will see that this is central to our recommendations this year, along with the implementation of the measures needed to achieve the energy transition, as set out in the REPowerEU plan we presented last week.
There has been renewed, if uneven, progress over the past year in the correction of macroeconomic imbalances. The effective implementation of national recovery and resilience plans and of REPowerEU should also help to drive this gradual improvement going forward.
Of course, the development of imbalances cannot be disconnected from the economic outlook. So we will need to continuously monitor their evolution given the high uncertainty and risks I already mentioned.
Last but not least, we continue to integrate the UN Sustainable Development Goals into our economic policy coordination and the country reports we have published today summarise the progress of each Member State towards implementation of the SDGs, and include a detailed annex, based on the monitoring carried out by Eurostat.
Eurostat has also published its third annual report this morning on the implementation of the SDGs in the EU.
While progress has been observed with regard to most SDGs, there are of course areas where more needs to be done. This includes combatting climate change and its impacts.
Lastly, as far as the review of our economic governance is concerned, discussions are progressing and we will come forward with our guidance after the summer break.
And with that I will conclude so we can take your questions.