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EU to ask governments to start withdrawing fiscal support in 2023 -Dombrovskis

© Reuters. FILE PHOTO: European Commission Vice President Valdis Dombrovskis speaks during an interview with Reuters in Brussels, Belgium, February 23, 2022. REUTERS/Clement Rossignol

By Jan Strupczewski

BRUSSELS (Reuters) – The European Commission will ask EU governments next week to start withdrawing in 2023 generous fiscal support they provided during the pandemic because the economy has recovered and is growing strongly, Executive Vice President Valdis Dombrovskis said.

This move on March 2 will be the first time the Commission will call for a clear reduction in fiscal support since the start of the pandemic. Its recommendation for 2022, issued in November, was for a still “moderately supportive fiscal stance”.

The Commission will issue this fiscal guidance to EU governments because normal EU fiscal rules that limit government borrowing to support the euro have been suspended since early 2020 to create room to fight the pandemic.

“It’s time to start to moderate and start thinking about withdrawing fiscal support,” Dombrovskis told Reuters in an interview.

“Its time to move towards normalization of fiscal policy and we have been always emphasizing that the fiscal support, which we are providing now, should be temporary and targeted,” he said.

EU governments have been pumping hundreds of billions of euros into their economies to keep them going during the pandemic. This boosted public debt but kept unemployment low despite the deepest recession in Europe in almost 100 years.

Under EU rules, governments should not run debts higher than 60% of GDP and deficits no higher than 3% of GDP. But average government debt in the euro zone is now around 100% of GDP. It is close to 160% in Italy and above 200% in Greece.

“Of course we need to remain agile and if there are new shocks and new problems we need to be able to react and adjust our policy response accordingly,” Dombrovskis said.

EU fiscal rules will be reinstated from 2023, but the Commission and governments are working to revise them to make them more suited for the post-pandemic reality of very high debt and the huge investment needed to prevent climate change.

EU rules now say that governments have to reduce their public debt by 1/20th of the excess above 60% every year — a pace many of the high-debt countries cannot achieve.

Dombrovskis said the reform of the rules will allow governments to cut their debt more gradually, though how much more remains to be agreed. EU ministers will discuss the reform of the rules on Friday and Saturday in Paris.

“We are looking at how to make this debt adjustment more gradual, more growth friendly,” he said.

He said among the options was to differentiate the pace of debt cuts between countries close to 60% and those that have very high debt or have individual debt reduction paths agreed between governments and the European Commission.

“This is a topic which is still open and that’s why the debate in upcoming weeks and months will be very important because that will give the Commission more clarity what the ‘landing zone’ could possibly be,” he said.

He said there were different views among EU governments on whether to exempt investment to turn the economy “green” and more digitalised — crucial goals for the 27-nation bloc — from EU deficit calculations, but noted that money borrowed for green investment was still debt that would have to be repaid.

EU to ask governments to start withdrawing fiscal support in 2023 -Dombrovskis

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