The Eurogroup sees it as essential that EU countries with high debt (such as Spain, Italy, Greece, Portugal or France) start the budget adjustment from the year 2023 despite the economic impact of the Russian invasion of Ukraine. Of course, the finance ministers admit that economic policy must remain “agile” and “flexible” in the coming months in order to respond to a worsening of the crisis. Namely, this recommendation could quickly become a dead letter if the negative effects of the war worsen.

In fact, several Member States (notably Portugal and Greece) have called for the Stability and Growth Pact -Forcing deficit reduction below 3% and debt below 60%- remains suspended also in 2023 to be able to give public aid to the sectors most affected by the war.

The Stability Pact was frozen in March 2020, after the outbreak of the pandemic, and the original plan is to apply it again next year. But Brussels has postponed the final decision at the end of May or beginning of Juneonce updated economic forecasts are available.

Pending more information on the economic impact of the war in Ukraine, the finance ministers agreed this Monday that the fiscal position of the eurozone as a whole should go from expansionary this year to neutral in 2023. The reason is that all the Member States will have already recovered their pre-crisis level of GDP by the end of 2022 and unemployment is at historical lows. “The fundamentals of the eurozone economy are solid,” reads the statement approved by the Eurogroup.

At the same time, finance ministers are calling for budgetary strategies to be differentiated between heavily indebted countries and those with low debt levels. “With a view to preserving debt sustainability, in Member States with high public debt, we agree that it is appropriate to start a gradual fiscal adjustment to reduce its public debtif conditions allow it,” says the Eurogroup.

Eurogroup President Paschal Donohoe rings the bell to kick off Monday’s meeting


“This adjustment should be integrated into a credible medium-term strategy to continue promoting investment and the necessary reforms for the double transition (digital and green) and improving the composition of public finances”, continues the statement. At the opposite extreme, low-indebted Member States (such as Germany or the Netherlands) “should prioritize the expansion of public investment when necessary.”

In any case, the Eurogroup admits that the level of uncertainty “has increased significantly” due to Russia’s war against Ukraine, which is added to other risks such as problems in supply chains, the escalation of energy prices and inflation. . “Our budget policies must remain nimble and flexibleand we stand ready to adapt our position to changing circumstances as necessary,” the statement said.

The Eurogroup’s recommendations have begun to be questioned by some countries even before they are formally approved. “Portugal considers that, although it is true that it is important to start the process of reducing public debt, this reduction must be done gradually and has to be compatible with aiding economic recovery in a context of great uncertainty like the current one,” defended the Portuguese Finance Minister, Joao Leao.

“Portugal understands, like other countries and the Commission itself, that the return to budget rules in 2023 must be rethought,” Leao stressed. In his opinion, the return to the Stability Pact next year was decided in a context that has now completely changed as a result of the war in Ukraine. “It is necessary to consider whether it is a good idea to extend the escape clause (of the Pact) for an extra year“, agreed his Belgian counterpart, Vincent Van Peteghem.

In contrast, the German Finance Minister, Christian Lindner, the main champion of budgetary rigor in the euro zone, has said that it is premature to consider an extension in the suspension of the Stability Pact. “You have to look at economic developments. Let’s hope it doesn’t get worse. It’s not the right time to decide,” says Lindner.

Reform fiscal rules

“The economic impact of this war will not be insignificant,” warns the Commissioner for Economic Affairs, Paolo Gentiloni. “The rise in energy prices, the problems with raw materials, inflation and the extra costs in the budgets of the various Member States will certainly have a dampening effect on growth forecasts“, he argued.

“We anticipated growth of 4% for this year at European level and this figure is no longer realistic”, acknowledges the former prime minister. “There is a lot of discussion about a scenario of stagflation. My point of view is that if we act forcefully, we can avoid it. We entered this crisis with a high-speed recovery in Europe. Some of this recovery will fade quickly, but we can reduce the impact if we react quickly as we did with the Covid crisis,” Gentiloni insisted.

Commissioner Paolo Gentiloni talks with Vice President Nadia Calviño during Monday's meeting in Brussels

Commissioner Paolo Gentiloni talks with Vice President Nadia Calviño during Monday’s meeting in Brussels


In his opinion, the EU cannot reapply the Stability Pact in 2023 without having previously reformed it. “Returning to the old rules in a climate of uncertainty such as the current one would be unreasonable“, he pointed out. At the same time, Gentiloni admits that the Member States remain very divided on the necessary changes and points out that the reform “is not resolved in a few days.” Brussels plans to present legislative proposals before the summer.

For her part, the first vice president, Nadia Calviño, explained that it is still “too early” to make an estimate of the economic impact of the war in Ukraine, but has ruled out any relapse into recession. All economic organizations “expect that this attack slow down the recovery, which was already quite strong in Europe, but not derail it“, he maintains.

“Spain is one of the countries least exposed to aggression against Ukraine and therefore it is one of the countries for which the least economic impact is expected. But it is clear that this attack is already having an impact,” said the economic vice president. A blow that translates into higher energy prices and also raw materials “very important for the agri-food sector.”

In this sense, Calviño alleges that the priority now must be “minimize the negative impact of this attack in terms of growth and also in terms of inflation”, with measures both at a national and European level. “We must focus our energy on trying to guarantee that we continue to have a strong recovery”, he insisted.


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