Assessment of the fiscal stance appropriate for the euro area in 2023

On 22 June 2022, the European Fiscal Board (EFB) published its assessment of the appropriate fiscal stance for the euro area in 2023. The report recommends a moderately restrictive fiscal impulse in 2023 and, in a context of rapidly tightening financial conditions, considers fiscal consolidation particularly important for high-debt countries. The war in Ukraine has massively accelerated an already rapid pace of price increases for both food and non-food commodities—especially energy–, reducing EU economies’ real disposable income and inflating production costs. Despite strong headwinds, growth is expected to remain positive, as the economy still enjoys some post-pandemic recovery momentum, while labour markets remain tight and inflation proves unexpectedly persistent. Against this backdrop, a broad-based fiscal expansion would be counterproductive: it would further feed inflationary pressure, complicating the ECB’s task to keep inflation in check. The Commission has proposed making use of the severe economic downturn clause for one more year, while acknowledging that the conditions previously indicated for the use of the clause are no longer met. Professor Niels Thygesen, Chair of the EFB, stated: “Not all Member States are convinced of this proposal, but the Council is likely to go along. Does this matter for the policy guidelines for 2023? We believe it does matter. The Commission issued mostly qualitative guidance, differentiated to some extent between two groups of Member States -‘high-debt’ and ‘low/medium-debt’ Member States. However, given the extensive interpretation of the severe economic downturn clause, compliance with more specific advice may not improve”. The EFB recommends a transparent and consistent use of flexibility in the rules-based economic governance system, while containing structural pressures on public expenditure. As the consequences of the war spread in the economy, fiscal policy should focus on protecting vulnerable households through targeted and temporary redistributive measure.