Brussels warns that the invasion of Ukraine hits the EU economy

This March 2 was going to be the day on which the European Commission presented guidelines for governments to prepare their next budgets. The idea was to guide the 27, at a time when the Stability and Growth Pact is still deactivated –and under review–; most countries are in an economic situation similar to the pre-pandemic; and the vaccine, as well as the end of winter, augur better health data. Consequently, Brussels was going to present a framework that would respect fiscal flexibility so as not to slow down the rebound of the economies, but while monitoring public spending.

That was the theory.

The reality is that last Thursday at four in the morning Russian President Vladimir Putin decided to attack Ukraine. And from there, everything has changed. What impact will the war have? "It's difficult, it's too early," acknowledges the European Commissioner for the Economy, Paolo Gentiloni: "Uncertainty has increased, but it will have a negative impact." However, Gentiloni expects that "it will have a significant weight in the expected economic expansion in the EU, but without derailing it, only weakening it."

"Russia's invasion of Ukraine has undermined European and global security and stability," states the European Commission: "The EU faces some immediate challenges, such as refugee flows, security and potential Russian responses. This The crisis risks negatively impacting growth, including through repercussions on financial markets, higher pressures on energy prices, persistent supply chain bottlenecks and effects on confidence.

Brussels acknowledges that the forecasts published three weeks ago "did not take into account the invasion of Ukraine and the consequent geopolitical tensions. This negatively impacts growth prospects and increases risks. For example, inflation may turn out to be higher than expected as result of cost pressures from bottlenecks Higher energy prices passing through more from producer to consumer prices may weigh on aggregate demand Supply bottlenecks likely to persist well into 2022. In addition, higher-than-expected second-round effects of potentially above-productivity wage increases may keep inflation high for a longer period.”

"On the positive side", affirms the Community Executive, "the investments promoted by European funds and the EU budget [Marco Financiero Plurianual, MFP]including EU cohesion policy funds, could provide a further boost to activity."

budget guidance

"The idea is to help the Member States with their stability and convergence programmes", explained the economic vice-president of the European Commission, Valdis Dombrovskis.

"Given the exceptional uncertainty", said Gentiloni, "the Commission will not propose to open new excessive deficit procedures this spring. We will revisit the issue in the autumn. Also, in view of this uncertainty, we confirm that our recommendations for 2023 will be formulated in new in qualitative terms, with a quantitative underpinning".

To this end, the Brussels guidelines are organized into five key principles that will guide the Commission's evaluation of the stability and convergence programs of the Member States, as well as the budget recommendations that the Community Executive will propose to the Member States in May 2022 for their budget plans for 2023.

Ensure policy coordination and a consistent policy mix. "Fiscal policy coordination remains key," says Brussels: "Continuous strong coordination of fiscal policies is needed to ensure a smooth transition to a new path of sustainable growth and fiscal sustainability. The right fiscal stance for the euro area must be the result of an appropriate balance between sustainability and stabilization. It is essential to achieve such articulation at the country level and taking into account the euro area/EU dimension".

Ensuring debt sustainability through high-quality, gradual fiscal adjustment and economic growth. "A multi-year fiscal adjustment combined with investments and reforms is needed to sustain growth potential in order to curb debt dynamics", states the European Commission: "It is important to ensure sustainable public finances through a gradual reduction of the high debt public".

Encourage investment and promote sustainable growth. "All Member States should protect general investment and, where justified, expand financed investment at national level, also for the green and digital transition. Emphasis should be placed on quality investment, in line with investment financed by the Recovery and Resilience Fund", says the communication from the European Commission.

Medium-term fiscal adjustment. "The fiscal adjustment in the highly indebted Member States must be gradual", says Brussels, "not give rise to an overly restrictive fiscal policy, and have investments and reforms that relaunch the growth potential, facilitating the achievement of credible trajectories of indebtedness downward. The path of fiscal policy adjustment should take into account the effects of RRF support on economic activity."

Differentiate fiscal strategies and take into account the dimension of the eurozone. "Fiscal recommendations must continue to differ between Member States and take into account the possible effects of contagion between countries," says Brussels.