MNI SOURCES: EU Officials Fear '21 Fiscal Stance Near Neutral

An unwieldy and complex application process for grants under the EU's Recovery and Resilience Fund may combine with what early plans indicate will be "close to neutral" fiscal stances by member states in 2021 to leave the bloc's Covid-damaged economy weaker than hoped for next year, EU officials fear.

One source close to the National Recovery Plan process said the Commission-designed procedure for grant application had become a bureaucratic "nightmare" for member states.

"That is the issue… they are asking for a lot of reforms in addition to the investments they make with the grants," said one source with knowledge of proceedings. "The process should have been more streamlined."

Preliminary NRPs are due to be submitted for EU vetting in early 2021 and final versions by April. But a first review by EU officials of member states' Draft Budgetary Plans for 2021 suggests they may prove too neutral for a fiscal year in which the eurozone must struggle through the aftermath of Covid-19 and also forge a basis for longer-term recovery.

FISCAL STANCE CLOSE TO NEUTRAL

"Fiscal policy - as the sum of national efforts - in 2021 looks close to neutral. That would not be enough, if the recovery is petering out and if the [EU Covid emergency funds] only start disbursements later in the year," an official said.

In its Summer Forecasts in July, the European Commission said it expected the eurozone economy to grow by 6.1% in 2021 after contracting by 8.7% in 2020.

But the mood has darkened. One source close to talks said a neutral stance for fiscal policy would leave states overly dependent on the RRF, which will not have an economic impact until H2 2021 at the earliest, meaning that the complications of the grant process could seriously stymie recovery.

"Obviously national budgets can respond in terms of automatic stabilisers, but there is no scope there for discretionary fiscal action from national governments," said another source.

Irish Finance Minister and Eurogroup President Paschal Donohoe called at the body's last meeting for national fiscal policies to remain "flexible and agile" in light of recent disappointing economic developments.

LONGER-TERM WORRIES

More concerning yet is the outlook beyond 2021 and the prospect of the deactivation of the General Escape Clause from the EU's fiscal rules sometime in 2022, potentially further constraining national fiscal stimulus efforts.

Adding further to this worrying outlook is the continuing reluctance of many states to take advantage of loans which are available under the RRF, or to access the soft loan window at the European Stability Mechanism's Pandemic Credit Line.

One source said member states did not trust Brussels' encouragement to increase national spending and worry conditionality will kick in with a vengeance in coming years:

"You're telling us to spend whatever this year, but you'll come get us next year".

All this has many believing that the ECB will need to extend the lifetime of its PEPP programme from mid-2021 until at least the end of next year.