European Commission proposes to keep EU borrowing limits suspended in 2023

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BRUSSELS, May 23 (Reuters) – The European Commission proposed on Monday to keep EU curbs on government borrowing suspended in 2023 amid great economic uncertainty and a sharp slowdown in growth caused by Russia’s invasion of Ukraine.

The European Union’s budget rules, the Stability and Growth Pact, were set up to protect the value of the euro. They were suspended at the start of the pandemic in 2020 to give governments room to fight the economic fallout of COVID-19.

They were to be reinstated in 2023, but new risks to the economy from the war in Ukraine, a fresh spike in energy and food prices and the impact on consumer and business confidence made the Commission reassess that.

The suspension of the rules is called in EU jargon the activation of the general escape clause.

“The conditions to maintain the general escape clause of the Stability and Growth Pact in 2023 and to deactivate it as of 2024 are met,” the Commission said.

The Commission forecast earlier in May that as a result of the war in Ukraine, euro zone economic growth in 2022 will be 2.7% rather than the 4.0% forecast in February.

But much of the growth will be due to carry-over effects from 2021, pointing to new fragility of the economy caused by the Ukraine war.

“Heightened uncertainty and strong downside risks to the economic outlook in the context of the war in Ukraine, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause through 2023,” the Commission said.

The Commission said already in March that it would not apply in 2023 one of the most disputed rules under which governments must cut debt by 1/20th of the excess above 60% of GDP a year.

Countries such as Italy, with debt of 160% of GDP, or Greece with more than 200%, would simply not be able to comply.

Euro zone finance ministers also agreed in March to tighten fiscal policy a little next year after three years of pumping billions into the economy due to the pandemic, but also to be ready with more cash should the war in Ukraine require it.

German Finance Minister Christian Lindner told reporters at a G7 ministers meeting on Friday he did not believe the data was sufficiently bad to justify another year of suspension of the borrowing limits and that his country would not make use of it.

“From our point of view, the data are not such that a further lifting of the rules of the Stability Pact is absolutely necessary,” he said. “Germany, in any case, will not have any use for it,” he said.

(Reporting by Jan Strupczewski)

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