ECB: Important to Provide Fiscal Support, But Also to Strengthen Fiscal Sustainability

24 June 2021

By David Barwick – FRANKFURT (Econostream) – Fiscal support for the recovery is needed for the moment, but euro area member states must also think about shoring up their fiscal affairs, the European Central Bank said on Thursday.

In a contribution to its fourth economic bulletin of the year, the ECB, based on a review of euro area countries’ medium-term budgetary plans for exiting the crisis, said that fiscal policies, ‘complemented by the NGEU and accompanied by appropriate structural policies, have a major role to play in’ terms of measures that support the recovery.

The euro area aggregate deficit of some 8.7% of GDP this year will top pre-crisis levels through 2024, but the current variance among individual government deficits, ranging from 2% to 12% of GDP in 2021, will diminish, the ECB said.

Whereas some member countries won’t get their deficits to under 3% of GDP in 2024 – the analysis highlighted here high debt-to-GDP countries including Italy, Spain, Belgium and France – others, among them the former programme countries Greece, Cyprus and Portugal, would come in at well under 3%, the review found.

As to debt-to-GDP, the average ratio would remain at about 100% in 2024, down from a projected 103% this year, the ECB said. Debt incurred to finance the NGEW is now piling up at the level of the EU and would constitute an additional 1% of GDP by the end of next year, it noted.

‘The medium-term budgetary plans as outlined in the 2021 stability programmes are surrounded by a high degree of uncertainty’, the ECB said. ‘This uncertainty relates not only, inter alia, to the evolution of the COVID-19 pandemic, but also to the potentially large transformative impact on the euro area of the [Recovery and Resilience Facility].’

‘It is therefore important for the euro area as a whole that fiscal policies continue to provide support for the time being, while strengthening fiscal sustainability through sufficiently targeted measures and gradually differentiated policies at the national level’, the ECB added.