First published on
16 June 2021

The European Fiscal Board (EFB) published on 16 June 2021 the assessment of the appropriate fiscal stance for the euro area in 2022. The report recommends a gradual withdrawal of the fiscal measures implemented since the onset of the crisis and considers the fiscal stance in 2022 implied by current policies appropriate.

The rollout of the Covid-19 vaccines and the strong policy response have contributed to the rebound of the economy in the single currency area, after contracting by almost 7% in 2020. The rebound is sustained by the improving global economic outlook, the release of pent up consumer spending, the implementation of the EU’s Recovery and Resilience Facility (RRF) and still substantial fiscal and monetary support. While the recovery is broad-based across the entire euro area, the forecasts for 2022 differ for each country on the basis of the particular impact of the health crisis, structural legacies and the sectoral composition of their economies.

Professor Niels Thygesen, Chair of the EFB, argued: “In view of the rapid recovery from a deep downturn, an assessment of the fiscal stance must factor in the operation of automatic stabilisers and the unwinding of emergency measures. Considering that conventional indicators underestimate the strength of fiscal support, the euro area fiscal stance in 2022 implied by current policies appears appropriate.”

As the health crisis recedes, beyond its overall size, fiscal support should shift towards the implementation of more targeted initiatives that promote sustainable long-term growth and support the need to achieve the digital and green transitions. The EFB recommends a swift reform of the EU economic governance framework to ensure a smooth normalisation of fiscal and monetary policies after the deactivation of the severe economic downturn clause in 2023.

Background

The European Fiscal Board (EFB) is an independent body mandated to advise the European Commission on the overall direction of fiscal policy of the euro area and to evaluate how the EU fiscal governance framework is executed. It was formally established end 2015 (Commission Decision (EU) 2015/1937 establishing the EFB) and began operating shortly after its members were appointed in October 2016.

One of the main tasks of the EFB is to assess fiscal policy from the perspective of the euro area.  In the Economic and Monetary Union (EMU), Member States maintain the full responsibility for fiscal policy making subject to commonly agreed rules, the Stability and Growth Pact. The Pact guides Member States towards achieving fiscal positions that ensure sustainable debt and offer room to absorb normal cyclical fluctuations. The post-2007 crisis has shown that the pursuit of national fiscal policies in accordance with the Pact does not necessarily result in an appropriate stance for the euro area as a whole, especially when monetary policy is constrained. By throwing light on the euro area dimension, the assessment of the EFB is meant to improve the coordination of national fiscal policies in the single currency area and, ultimately, contribute to the smooth functioning of the EMU.

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