EU moves from austerity to ‘fiscal expansion’

The European Commission has sanctioned a 0.5 per cent “fiscal expansion” across the euro area next year, in the first signal of a shift in the EU’s policy of austerity.

A communique issued today as it launched its autumn economic package in Brussels said, “at this point in time, the commission considers that there is a case for a significantly more positive fiscal stance for the euro area”, though it noted that the recovery is still not accelerating.

It states that, for member states, the appropriate fiscal expansion could be 0.3 per cent at the lower end of the scale, or as high as 0.8 per cent in some cases.

More fiscal space

The development could give the Government more fiscal space in the coming years as it seeks to address demands on the public finances.

In its analysis of the draft budgetary plans submitted by member states to the commission, Ireland’s budget for 2017 was found to be broadly in line with the commission’s stability and growth pact. In contrast, the commission warned eight countries they are at risk of non-compliance with the EU’s economic rules.

“The Irish economy continues to perform well and short-term prospects, while subject to considerable uncertainty, remain reasonably good,” the commission states in its analysis of Ireland’s draft budgetary plans, noting that GDP is forecast to increase by 4.2 per cent this year.

But it highlighted the risk of the British decision to leave the EU to the Irish economy.

“A major source of uncertainty – especially from an Irish perspective – relates to the trajectory for the UK economy,” it states, noting that while most economic data from the UK has been relatively solid since the result of the referendum, it is likely that the impact will materialise later.

Announcing the new development which was agreed following a meeting of all 28 EU commissioners in Brussels, commission president Jean-Claude Juncker said the recommendation of a positive fiscal stance would "support the recovery and the monetary policy of the European Central Bank, which should not bear the burden alone.

“Every member state should play its part: those that can afford it need to invest more, while those which have less fiscal space should pursue reforms and growth-friendly fiscal consolidation,” he said.

Let down by globalisation

Commissioner for Economic Affairs Pierre Moscovici said this was the first time the EU had encouraged fiscal expansion, and that it was a reflection of the times, when many citizens feel let down by globalisation and are questioning the EU’s policy. The encouragement of a more positive fiscal stance would help overcome the risk of “low growth, low inflation”, he said.

However, he defended the EU’s budget rules, noting that the stability and growth pact had helped to bring the overall deficit down from 6 per cent in 2010 to 1.25 per cent in 2016.

“We can’t pretend that the stability and growth pact is not working – it is effective,” he said.

European finance ministers will hold their first discussion on the recommendations at scheduled meetings on December 4th.

Despite Spain and Portugal missing budget targets this year, the commission said no regional funds would be withheld from the countries, though they remain “at risk of non-compliance” with EU rules.