Today, we build on last week’s Autumn Forecast and gives policy guidance on this basis. Our objective is to chart a course for the EU and our Member States’ economies through this difficult period, with still turbulent waters. And of course, to keep our Union on track towards the Sustainable Development Goals.
I will focus on three of the main components of today’s package.
First of all, the euro area recommendation
As the ECB pursues the fight against inflation – with good results, but the fight is not concluded – we need to adopt coordinated, prudent fiscal policies, starting with the winding down of energy support measures.
This is key both to enhance public finances’ sustainability and to avoid fuelling inflationary pressures – and thus to help households recover purchasing power.
Yet it is equally important for governments to remain agile, as geopolitical tensions cast a shadow of uncertainty across the economic outlook.
We also call on euro area governments to ensure high and sustained levels of investment, both public and private. You will recall that we have estimated at €650bn the annual additional investment needs up to 2030 for the green and digital transition. So we need to accelerate the implementation of the RRF and Cohesion Policy programmes. But we also need to remove barriers to the deployment of private capital in the EU, ensuring that State aid does not distort the level playing field in our Single Market. Because it is clearly private investment that will be the main contributor to this mountain of investment for the transition.
The labour market has remained resilient so far, even if we see some recent signs of cooling in some countries. However, wage growth has not kept up with inflation and this has affected low-income households most of all. So we are calling to support wage developments that mitigate the loss in workers’ purchasing power, of course taking into account competitiveness dynamics.
Finally, regarding the financial sector, it will be important to monitor risks related to tightening financial conditions to ensure a sufficient flow of credit to the economy.
Second, let me turn to the key findings of the Alert Mechanism Report, with its focus on developments in macroeconomic imbalances.
The good news is that strong nominal economic growth has facilitated the reduction of debts by households, corporations, and governments. At the same time, we must be aware that higher financing costs can affect indebted households, government and companies and create stress for the financial sector.
This Alert Mechanism Report also concludes that the entrenchment of cost competitiveness deteriorations is becoming a more concrete risk, as price and cost pressures continue to diverge across the EU. This needs to be monitored carefully.
Our report highlights two main concerns:
First, as regards external imbalances, we see that several countries face the prospect of larger external deficits than before energy prices increases. This is because of high energy import dependency and resilient domestic demand, associated with loose fiscal policy. At the same time, the surpluses which fell in 2022 are now back on the rise.
Second, house price dynamics, and their possible spillovers into other sectors, remain a cause for concern in some Member States – since despite the overall recent reversal in house price growth, in some Member States property prices continue to increase markedly and construction activity remains strong.
We will again be carrying out in-depth reviews for the 11 Member States identified last spring as having imbalances or excessive imbalances. In addition, we will carry out an in-depth review to assess the risk of newly emerging imbalances in Slovakia.
Finally, the Opinions on the 2024 Draft Budgetary Plans for the 20 euro-area Member States.
These Opinions are anchored in the Council’s fiscal recommendations adopted last July, which saw the return to quantitative recommendations after four years in which the general escape clause was activated.
So these post-general escape clause recommendations have focused on three key dimensions.
The respect of the limit to the growth of net primary expenditure;
The winding down of energy measures and the associated deficit reduction; and
The preservation of nationally financed public investment.
Overall, the conclusions of our assessment are that:
The draft budgetary plans of seven Member States are in line with the Council Recommendations.
Those of nine Member are not fully in line with the Recommendations and these countries are invited to address the specific issues emerging from our assessment.
Lastly, we consider that four draft budgetary plans risk not being in line with the Council Recommendations.
Importantly, all Member States plan to preserve nationally financed public investment, alongside the support to investment provided by the RRF. This is in stark contrast to the substantial cuts to investment we saw in the wake of the financial crisis. Of course, determined implementation of the national Recovery and Resilience Plans remains of fundamental importance. Because we need both stability and growth. And we should not be resigned to a new period of ‘low for long’ when it comes to the growth of the European economy.
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