Assessment of the fiscal stance appropriate for the euro area in 2022

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.