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(MNI) Brussels

A likely shift by Eurozone finance ministers at their meeting on July 11 towards signalling a tighter fiscal stance in order to assist the European Central Bank’s fight against inflation will still allow leeway for significant investment in energy, a senior EU official said.

“With inflation being so high, fiscal policies need to take that into account to avoid fuelling inflation dynamics. That means that the broad-based fiscal measures put in place during the pandemic, now is the time to phase that out,” said the official, in comments which came after ECB President Christine Lagarde called for fiscal policy to be tightened so as not to further feed inflationary pressures. (See MNI: Euro Ministers To Signal Tighter Fiscal Stance- Officials)

But investment aimed at alleviating supply side constraints, particularly in the energy sector should continue to be promoted, the official said.

“Since this investment will potentially augment the productive capacity of the economy that will not be a problem for inflation,” he said, as EU energy ministers confirmed today that they will hold an emergency meeting on July 26 in order to discuss readiness for the winter, as Russia announced gas pipeline maintenance shutdowns which will hamper European plans to ramp up storage levels.

RECESSION THREAT

The Eurogroup of finance ministers will offer “meaningful advice” for member states’ draft budgetary plans following their July 11 meeting, though their power to provide more binding guidance is limited given that fiscal rules under the EU’s Stability and Growth Pact have been waived for 2023.

The official said fiscal measures aimed at protecting vulnerable groups should also be maintained, but on a more targeted and temporary basis.

Overhanging the EU’s discussion is the increasing threat of recession in both the U.S. and the eurozone.

“With the economy in a state of flux, fiscal policy must remain agile and must be ready to respond to changing circumstances,” the official said.

MNI Brussels Bureau | david.thomas.ext@marketnews.com
MNI Brussels Bureau | david.thomas.ext@marketnews.com

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