EU fiscal rules will remain suspended to cushion the impact of Ukraine war

The EU’s fiscal rules will remain suspended until the end of 2023 to help countries cushion the economic fallout from the Ukraine war.

The European Commission made the widely-expected announcement on Monday morning while presenting the macro-economic review for each member state.

The disciplinary rules, known as the Stability and Growth Pact (SGP), require countries to keep their public deficit under 3% and debt under 60% of GDP, limits that many states currently exceed by a considerable margin.

The rules were paused in March 2020 to cope with the effects of coronavirus restrictions and have remained on hold ever since.

Brussels was planning to reactivate the SGP at the end of this year but Russia’s invasion of Ukraine has prompted the Commission to revise its plans and prolong the suspension for another year.

The final decision has to be approved by member states.

It comes as European countries deal with soaring energy prices, record-breaking inflation and significant trade disruption caused by EU sanctions and a drawn-out lockdown in Shanghai, China.

European economy commissioner Paolo Gentiloni said the present economic situation was different from the financial disruption triggered by the pandemic.  

“At that time, the reaction was inevitably a universal reaction, we were supporting everyone in every sector, we were in a disaster,” Gentiloni told Euronews.

“Now we use the [suspension] to make easier the transition from universal support to a moment of more targeted and prudent support.”

Member states in high debt should make sure the measures they take are tailored to where the help is needed most and to bear in mind that economic exceptions are no longer the norm.

“If energy prices continue to increase, if we have, apart from the prices, also problems of supply of energy, the risk to go into negative territory could materialise,” the Commissioner warned, inviting countries to use the money allocated under the coronavirus recovery fund, known as Next Generation EU.

Gentiloni added that countries can avoid a recession if they use these resources in the right way, but stressed the economic outlook still remains highly uncertain.

The Commission’s initial goal is to reactivate fiscal rules at the beginning of 2024, although this is contingent upon the evolution of the Ukraine war

The fiscal policies that countries undertake next year should expand public investment needed for the green and digital transition and energy security, Gentiloni said. Governments should also provide targeted measures to mitigate the impact of the energy crisis and provide humanitarian aid to people fleeing Ukraine.

More than six million people have left the country since the invasion began on February 24.

Monday’s announcement comes days after the Commission unveiled an ambitious plan to wean the EU off Russian fossil fuels, a years-long transition that will cost up to €210 billion and require huge levels of public and private investment.