The European Union on Monday extended through 2023 its suspension of rules against overspending by the bloc’s governments, prolonging a pandemic-era reprieve because of Russia’s war in Ukraine.
“Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Ukraine, unprecedented energy price hikes, and continued supply chain disturbances warrant the extension,” the EU’s executive, the European Commission, said.
The EU suspended the public spending rules for national governments in March 2020 as the 27-nation bloc sank into its deepest recession since World War II because of Covid-19 restrictions.
Known as the Stability and Growth Pact, the EU rules limit deficit spending to three percent of a country’s overall economy and debt to 60 percent.
The pact was supposed to be reactivated on January 1, 2023, with the return of solid growth but Russia’s invasion of Ukraine has changed the situation.
The commission said the rules would now be reimposed “as of 2024”.
“This provides a space for national fiscal policies to react quickly if and when needed,” said Commission Vice-President Valdis Dombrovskis.
The pledge to restore the rules will hopefully reassure Germany and its “frugal” allies in northern Europe, who are fervent defenders of budgetary rigour.
The war and the impact of sanctions against Russia pushed Brussels last week to drastically reduce its GDP growth forecasts for the EU and the eurozone this year.
It is now counting on 2.7-percent expansion, down from four percent at the beginning of the year, and does not rule out a further deterioration.
The economy is suffering from soaring commodity prices, which are spreading from energy to food prices. The conflict and Covid shutdowns in China have increased problems in supply chains and increased uncertainty for both businesses and households.