MNI: EU National Budgets To Do Heavy Lifting On Ukraine Impact

A second pan-EU Recovery Fund or an expansion to the existing Covid support facility are not currently on the table to help cushion member states from the economic fallout from the Russian war in Ukraine, EU officials say, with a vulnerable German economy the main stumbling block.

The heavy lifting will fall to national budgets which will be given the flexibility through a further suspension of the EU’s fiscal discipline rules, according to the officials contacted by MNI, who acknowledge that the levels of support will not be enough offset the hit to consumers and businesses from higher energy prices.

In the current situation of already high public debt and high inflation levels, officials say governments the fiscal response will by necessity have to be targeted at poorer households and involve a transfer from higher-income households.

“Governments are now resigned to the fact that there will be a loss of welfare and people just have to accept it,” said one source. “It is fundamentally about redistribution, even though no-one wants to talk about that.”

GERMAN PREDICAMENT

While calls from some countries for new joint-EU borrowing plans have been made in recent months, EU officials say that these are not currently being progressed. The attitude of Germany towards any such scheme looks much more complicated this time, given that the EU state with the biggest room for fiscal action is the one most dependent on imported Russian oil and gas.

“During the pandemic, Germany was coping very well, while Covid was raging in Italy and Spain, and there were of course worries about fragmentation. This time it is Germany that is vulnerable, and this will be a factor when it comes to considering an NGEU2 (a second New Generation EU Recovery Fund).”

“The German point of view might be: ‘OK we don’t really consider doing that now, but maybe there’s a chance we have to ban Russian gas imports and that will be a massive shock, which has to be paid for.’ Will the Germans be so eager to finance or co-finance another massive borrowing plan?”

While many of the front-line Eastern European and Baltic states are also exposed to Russian gas supplies and are also bearing the brunt of the Ukrainian refugee crisis, officials expect any EU-level assistance to continue to be met by the current EU budget rather than a new joint borrowing programme.

EU FISCAL DISCIPLINE CAN WAIT

EU finance ministers and other top officials, like EU Economy Commissioner Paolo Gentiloni, continue to call for EU policy coordination, as well as for the policy response to remain flexible and agile. But officials say the coordination is limited to member states cooperating through national fiscal action and supported, as in the pandemic, by continued flexibility on EU fiscal rules.

One source reiterated his view that the extension of the General Escape Clause from the Stability and Growth Pact through 2023 is inevitable. Officials expect the EU Commission to signal a further suspension of the fiscal discipline rules when it publishes its Spring Forecasts on May 16.

“Extending the Escape Clause is the easy part, that’s the low hanging fruit,” the source said.

Meanwhile, reprioritising projects within the current Recovery Fund, particularly towards energy investment, looks like the way forward, officials say. “Energy should be possible under the RRF (Recovery Fund). Defence no, but energy yes,” said one.

But a carve-out for long-term defence spending from budget discipline rules is also envisaged. One official points out that, since the introduction of European System of Accounts 2010 for national accounts, investment in military hardware, such as weapons systems and jets, is classified as investment in EU national accounting rules.

“So, it should not be too difficult to find flexibility for that, using the investment rules of the SGP, even the current one,” said the source.