MNI: Inflation Prompts Fresh Calls For EU Budget Discipline

EU finance ministers are set for a difficult discussion on inflation when they meet in Paris on Feb. 25-26, with fiscally frugal ministers calling for the bloc to move towards more prudent budget policies in response to the surge in prices, officials told MNI.

Others will argue that higher inflation is the result of transient phenomena, such as the spike in gas prices and geopolitical tensions, in a key meeting ahead of the European Commission’s March 2 fiscal guidance, expected to confirm that the escape clause from the Stability and Growth Pact will be deactivated as of 2023.

With EU unemployment hitting record lows, pre-Covid concerns over growth and building back after the pandemic are going to be less of a priority for many ministers.

“Definitely, the issue of inflation will be very much discussed. In fact, it is likely to be the common theme in those two days because we are in a slightly different place to where we were a few months ago in terms of forecasts,” one EU source said.

FINE LINE

Officials said that European Central Bank monetary policy will not be questioned, despite the fact that ECB President Christian Lagarde, as well as governors of most EU central banks will be attending. But questions will be raised about the policy mix required to address the inflation surge.

“Obviously, monetary policy and fiscal policy mesh together, so if something is happening on one front then you also need to take that into account on the other front,” the official said. “I think there will be a discussion and with a more urgent level of concern than we would have seen at previous meetings.”

EU Executive Vice President Valdis Dombrovskis and EU Economic Commissioner Paolo Gentiloni will have to tread a fine line with next month’s fiscal guidance. While there will be a return to borrowing rules contained in the Stability and Growth Pact, higher-debt states will still require flexibility with their budget plans for next year.

French Finance Minister Bruno Le Maire, chairing the meeting, has set out an agenda focused on advancing France’s longer-term goals of ‘strategic autonomy’ and the new European Growth Model, but inflation concerns are likely to dominate.

The French government had hoped to avoid a debate on reform of the Stability and Growth Pact which would carry a significant risk of failure and which might damage President Emmanuel Macron’s chances of re-election in April.