Fiscal policy needs to remain responsible

Fiscal policy needs to remain responsible

Discussions in the European Union last week about the new fiscal rules, based on the European Commission proposals, indicated to the Greek government that it is no time for fiscal relaxation, but for responsible policy.

“We are not heading toward a Keynesian policy on the pretext of the departure of Bundesbank governor Jens Weidmann, and whoever thinks so is wrong,” said a Greek Finance Ministry source.

The first signs point to an intention to change the debt clause. This is a weight around Greece’s neck, as it provides for an annual reduction of the excessive debt by 5% a year (the rules define as excessive anything above the target of 60% of gross domestic product).

“Were that to apply strictly, Italy would be required to achieve fiscal surpluses of 6%-7% of its GDP every year, which is not feasible and makes no sense,” said European Stability Mechanism chief Klaus Regling. This is an important statement, as it is seen to express Berlin’s view.

On the other hand, the target for a budget deficit up to 3% of GDP remains unchanged, albeit with a certain degree of flexibility, in favor of making digital and green investments.

The Commission text notes there should be some fiscal space created in better times to allow for some support measures in difficult ones. In that sense, government officials believe that the exception applying this year and next should not serve as a pretext for allowing the budget deficit to swell. 

“Our deficit is at 9.9% of GDP,” the officials say, reminding that the Eurostat data published last week showed Greece last year had the second highest deficit and the highest debt in the European Union.

Various matters worry the Finance Ministry, such as the continuation of European Central Bank funding, the exit from enhanced surveillance, the court decisions on retroactive pension dues, etc.

With the need to return to primary budget surpluses from 2023, government officials say Greece needs to be responsible now. “This year requires caution. We need to convey the sense that the country is being rationally governed for the Eurogroup to retain its confidence in us and the people to realize that relaxation is not a new normality,” they say.

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