MNI: EC Call For Prudent ‘24 Fiscal Policies To Support ECB

The European Commission will call on member states to implement prudent fiscal policies next year to support the European Central Bank in bringing down inflation, a senior EU official said Tuesday.

“The inflation outlook calls for strong fiscal policy coordination and prudent fiscal policies in order to ensure a consistent fiscal and monetary policy mix and facilitate the task of monetary policy,” a Commission paper to be discussed by Euro Area finance ministers on Thursday states.

High and persistent inflation, a tight labour market and an economy running close to potential all supported the case for tighter fiscal policies, the official said. (MNI POLICY: EU Agree Tighter '24 Fiscal Stance, Debating Scale)

“There is quite broad agreement among member states that the fiscal stance should be restrictive,” the official said.

“The (Eurogroup) debate is going to be about how restrictive are we talking about,” the official added.

According to the official, the range of disagreement lies between 0.5% to 0.8% of GDP in terms of improvement in the fiscal structural balance, the first number proposed by the Commission in its recent 2023 annual economic policy advice to member states and the second by the European Fiscal Board, which favours a more restrictive stance to support the ECB.

The official noted that there was no disagreement that the minimum effort should be 0.5%, adding that its “not prohibited, it’s even desirable that member states should overachieve”.

NO PRECISE NUMBERS

However, while the Eurogroup is expected to issue a statement on the fiscal stance on July 13, no precise numbers would be cited, the official said, saying the discussion would be more about the direction of fiscal policy.

Member states had shown they can be agile in expanding stimulus in the event of exogenous shocks but correcting the fiscal stance had proven to be “much more complicated”, with space needed for green and digital investments within a prudential bias.

In the paper, Brussels warns member states that, while high inflation can provide temporary relief for public finances, lasting inflation would weigh on efforts to reduce debt as monetary policy tightening and higher interest rates boosted debt costs and slowed economic growth (MNI BRIEF: EU Budget Can't Cover NGEU Borrowing Cost Rise).

“At this juncture, a consistent stance of fiscal policies and monetary policy also mitigates challenges for the financial sector as it seeks to adjust to higher interest rates and reduces risks of increased dispersion of sovereign bond yields,” the official said”

The Commission paper will also call for a swift agreement on new EU fiscal rules for states, saying it would help “anchor” financial market expectations.