Eurozone governments to pledge continued fiscal support in 2022

Eurozone governments to pledge continued fiscal support in 2022

Eurozone finance ministers will pledge on Monday to keep supporting the economy with public money in 2021 and 2022 as the common currency area emerges from the depths of the coronavirus crisis, a draft statement seen by Reuters showed.

The ministers, known as the Eurogroup, will also say the support, so far worth 8% of eurozone gross domestic product in national fiscal measures and 19% of GDP in liquidity measures, or more than 3 trillion euros in total, would stay as long as there is an acute health crisis.

“The Eurogroup is committed to a supportive stance in the euro area in 2021 and in 2022, also taking into account the fiscal stimulus stemming from the RRF (Recovery and Resilience Facility),” said the draft statement.

The RRF totals 672.5 billion euros in loans and grants, to be borrowed jointly by the EU, on top of the national fiscal and liquidity measures so that EU countries hard hit by the pandemic which already have high debt can finance reforms and investments that will make their economies greener and more digitalized.

Last week, in a similar message of support, the European Commission, which is responsible for upholding EU limits on government borrowing, said such curbs should stay suspended next year.

The statements are meant to reassure markets and businesses that the euro zone will not start withdrawing support before a recovery takes firm hold and that it will safeguard investment, which was the first victim of the global financial crisis a decade ago.

Bond purchases

The message also dovetails with the European Central Bank’s statement on Thursday that it would step up bond purchases on the secondary market to keep yields from rising and keep favorable financing conditions for the economy.

The eurozone economy contracted 6.6% last year, its biggest recession so far, as a result of the lockdowns put in place to slow the spread of the Covid-19 pandemic since early 2020. Public support has kept many companies afloat, including those that would have gone bankrupt anyway, even without the pandemic.

“In a second stage, once the health situation improves and restrictions ease, fiscal measures should gradually shift towards more targeted actions to promote a resilient and sustainable recovery,” the ministers’ draft said.

“Viable but still vulnerable firms should be helped to avoid solvency problems, reopen and adjust their business models.”

The Commission expects growth of 3.8% this year and next, but public debt will rise above 100% of GDP on average in the 19 countries sharing the euro. Greece is already at 200% of GDP and Italy at 160%. But the ministers said they would deal with the debt when the time is right.

“Once the recovery is firmly under way, euro area Member States should address the increased public debt levels by implementing sustainable medium-term fiscal strategies,” the draft said. [Reuters]

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