MNI POLICY: EU Agree Tighter '24 Fiscal Stance, Debating Scale

Euro Area finance chiefs agree the bloc’s fiscal stance for 2024 should be significantly more restrictive than 2023 following years of covid and energy cost support measures, but there is less accord among member states on what that should mean in terms of quantitative consolidation, MNI understands.

Agreement on the broad approach was reached at a meeting of Euro Area finance officials in Brussels on July 3 and 4 as they prepared the agenda of the July 13 Eurogroup meeting, where the wider policy mix will be the key topic, all against the backdrop of the ECB's ongoing battle against inflation.

Eurogroup President Paschal Donohoe is set to issue a statement on the overall Euro Area fiscal stance following the mid-July meeting, calling on states to wind down the energy-related measures they adopted to address the spike in gas prices which followed Russia’s invasion of Ukraine last year.

As a result of these nuances on the required scale of tightening if not on the direction of fiscal policy, one frugal source said he expected next week’s statement -- which will not go into the detailed numbers -- to be tempered but still “somewhat hawkish”.

NOT THERE YET

But there remains no agreement among member states on what more restrictive should mean in quantitative terms.

In its annual Country Specific Recommendations for economic policy issued in May, the EU Commission called for a 0.5% of GDP reduction in structural deficits next year when EU fiscal rules will be back in force. They were suspended in 2020 because of the economic impact of the Covid pandemic.

But while some states -- including Germany, the Netherlands and others in the ‘frugals’ grouping -- saw this as a minimum effort at the meeting, southern and higher-debt countries regard 0.5% as more of a target.

In its last set of forecasts, the Commission projected that the Euro Area would see a restrictive fiscal stance of 0.8% next year while noting that the net effect of eliminating all energy-related support measures would be 1.25%. It called for states to eliminate all such policies and devote the proceeds to deficit reduction, although it advised that consolidation efforts should be no more than 1.25%.

Overall, the Eurozone fiscal stance is expected to be significantly more restrictive in 2024 than this year, with Germany and the frugal grouping of countries likely to try and go beyond what they say should be a minimum consolidation of 0.8% of GDP.

According to Eurostat, the euro area budget deficit for 2022 stood at 3.6%, ranging from -8.0% in Italy, to a surplus of 3.3% in Denmark. The Commission's forecast pointed to deficit improving modestly to 3.2% in 2023 then 2.4% in 2024.

INFLATION FIGHT

While higher-debt states are at least committing themselves to aim for that level of consolidation, it looks likely that they may fall short of winding down all of the extra spending they allocated to energy-related measures in 2022.

In June, the ECB again called for a prompt roll back of energy-related support measures in a concerted manner to avoid driving up medium-term inflationary pressures which would call for a stronger monetary policy response, whilst noting that fiscal policies should be designed to make the "economy more productive and gradually bring down high public debt".

The EU Fiscal Board has advised that 0.8% may not be enough in light of an expected return to more normal economic conditions next year, longer-term fiscal challenges and the need to support the ECB’s efforts to bring down inflation.