MNI EXCLUSIVE:Eurozone Seen Extending Debt Rule Waiver To 2022

The European Union is likely to extend a waiver of public borrowing rules under the eurozone's Stability and Growth Pact throughout 2022, but the bloc's overall fiscal stimulus is still set to decline next year, EU sources close to the discussions among finance ministers told MNI.

"2021 already will see significantly smaller fiscal support than 2020, although what is expected to be a bad Q1 in some countries and longer lockdowns in France and Germany will boost automatic stabilisers. But that will be reduced as people return to work," the official said.

"There is a general consensus among ministers that debt will be reduced by growth and not by austerity and that should be possible when we get back to growth and some inflation."

European officials assume that the Stability and Growth Pact's Escape Clause, activated last year in response to the Covid emergency, will be extended in 2022, the source said, adding however that it was not clear yet whether European Commission Vice President Valdis Dombrovskis has given his blessing yet to such a move.

Another EU source agreed that the Escape Clause was likely to be extended.

GROWTH TO EASE BURDEN

"That doesn't mean member states will be spending as much as 2021 – what must be avoided is any return to austerity or any indication of that," the source said. "It's important to shift from emergency support to structural reforms and investment in green and digital transition. But this switch will not be happening quickly."

With real growth at 2% and inflation at 1.5%, debt will decline as a proportion of output if fiscal deficits are kept to 3% of gross domestic product, the source said, noting that Eurogroup President Paschal Donohoe is keen to ensure employment and incomes are safeguarded even as countries gradually shift towards a more targeted fiscal approach.