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EU considers longer borrowing limit hiatus amid Ukraine crisis

© Reuters. European Commissioner for Economy Paolo Gentiloni speaks during a news conference on the European Commission fiscal guidance for 2023, in Brussels, Belgium March 2, 2022. REUTERS/Yves Herman

By Jan Strupczewski

BRUSSELS (Reuters) – The European Commission will assess in May whether fiscal rules that limit government borrowing should remain suspended in 2023, officials said on Wednesday, as a result of Russia’s invasion of Ukraine slowing economic growth in Europe.

The European Union’s Stability and Growth Pact was set up to protect the value of the euro, but the rules have been suspended since the start of the pandemic in 2020 to give governments room to fight the economic fallout of COVID-19.

They were to be reinstated in 2023, but new risks from the war in Ukraine, from sanctions on Russia and Russian counter-sanctions, a fresh spike in energy and food prices, swings in financial markets as well as effects on consumer and business confidence will make the Commission reassess that.

“Given the current uncertainty, we will need to reassess the expected (reinstating of the rules) in 2023 on the basis of our spring forecast, which I will present in mid-May,” European Economic Commissioner Paolo Gentiloni said.

Whatever the outcome of its assessment, however, the Commission will not apply in 2023 one of the most disputed rules in the suspended framework under which governments must cut debt every year by 1/20th of the excess above 60% of GDP.

Countries such as Italy, with debt of 160% of GDP, or Greece with more than 200%, would simply not be able to comply.

“We will not be applying the one twentieth rule for those countries with a debt ratio above 60% of GDP,” Commission Vice President Valdis Dombrovskis said.

For now, the Commission told EU governments they should move to a neutral fiscal stance next year from a supportive stance but be ready to adapt quickly if the Ukraine crisis produces new challenges for the rest of Europe.

It said high debt countries should focus in 2023 on tightening fiscal policy, while low debt ones, like the Baltics, eastern Europe or even Germany, focus more on more investment.

The Commission forecast on Feb 11 that euro zone growth would be slower than earlier expected, reaching only 4.0% in 2022 rather than 4.3%. Gentiloni said that uncertainty was so great it was impossible now to say how much growth would suffer this year with any degree of accuracy.

“Uncertainty and risks have increased markedly, which is why our guidance will need to be updated as necessary, at the latest in the spring,” Gentiloni said.

EU considers longer borrowing limit hiatus amid Ukraine crisis

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