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Due to strong and coordinated EU-wide policy response, the member states managed “to navigate” stormy economic waters. However, the EU still faces many challenges; geopolitical turbulence just added a great deal of uncertainty: hence the growth in the EU-28 is around 1.3 percent. The EU Commissioners made in the new Semester some assessments…
The EU’s economic activity has slowed down during 2023; the states governance and consumers are struggling with higher prices, global demand is weak and high inflation has taken its toll in the European states; however declining is in sight.
The 2023- economic cycle has been focusing on longstanding structural problems, including weak productivity, ageing societies and challenges linked with adapting to the green and digital transitions. The EU member states are supported in their development and carrying out high-quality investments and reforms through the assistance from the national recovery and resilience plans, NRRPs. The latter are aimed at boosting long-term growth, productivity, resilience, competitiveness and social cohesion, in line with the European Pillar of Social Rights.
Reference to: https://ec.europa.eu/commission/presscorner/detail/da/STATEMENT_23_5957
Areas of concern
One particular area of concern is labour and skills shortages. Over two-thirds of employers cannot find the talent that they need – particularly in the healthcare, ICT and green sectors. There are other challenges too: from excessive regulatory and administrative burdens, insufficient access to financing and the need to promote more innovation. On a fiscal side, the Commission has recommended the states to ensure more prudent fiscal policies which would help to lower inflation, improve debt sustainability and rebuild buffers after the large-scale public spending during the pandemic and the energy crisis. Remaining emergency support that was provided to households and firms to offset very high energy prices at the time should be wound down.
And savings made should be used to reduce deficits; correspondingly, the EU recommended an overall restrictive fiscal stance in the euro area.
The Commission considers that seven states in the euro area are in line with the EU-wide fiscal policy guidance: Cyprus, Estonia, Greece, Ireland, Lithuania, Slovenia and Spain; nine countries are not fully in line: Austria, Germany, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal and Slovakia. Remaining four countries risk not being in line, – Belgium, Croatia, Finland and France; these countries need to make sure that their fiscal policies for 2024 follow the EU’s recommendations, which means reducing net current expenditure and, in some cases, further phasing out energy support measures.
Macroeconomic imbalances
There were the following points: first, while strong nominal growth has eased some longstanding imbalances, tighter financing conditions have increased concerns about existing high debts; second, price and cost pressures continue to diverge the EU-wide, which raises concerns about potential losses in the EU’s overall competitiveness, especially in countries with high inflation.
In early 2024, the Commission will prepare in-depth reviews for the 11 countries that were identified with imbalances or excessive imbalances in 2023: i.e. Cyprus, France, Germany, Greece, Italy, Hungary, the Netherlands, Portugal, Romania, Spain and Sweden. An in-depth review will also be undertaken for Slovakia, since it presents a risk of newly emerging imbalances linked to strong inflation, cost competitiveness losses and high fiscal deficits.
The European Semester ensures that these imminent priorities are tackled with, including the EU-wide long-term objectives and the consistent goals of competitive sustainability.
Two main components of the Autumn-2023 Semester’s package
= First, the Commission’s recommendation to euro area states: as the ECB pursues the fight against inflation, the member states have to adopt coordinated and prudent fiscal policies, e.g. starting with the winding down of energy support measures. This step is regarded a key both to enhance public finances’ sustainability and to avoid fuelling inflationary pressures; it consequently would help households recover purchasing power. However, the Commission thinks that it is equally important for states’ governance to remain agile, as geopolitical tensions cast a shadow of uncertainty across the economic outlook.
Besides, the Commission calls on euro area governments to ensure high and sustained levels of public and private investment: the EU has estimated that around €650bn of the annual additional investment is needed up to 2030 for the green and digital transition. That is why the states need to accelerate the RRPs implementation and the EU Cohesion Policy programs. In the EU-wide, it is necessary to remove barriers to the deployment of private capital and ensure that state aid does not distort the level playing field in the EU Single Market, as it is generally private investment that is regarded as one of the main contributors to investment for the EU-wide transitional measures. Finally, regarding the financial sector, it is regarded important to monitor risks related to tightening financial conditions to ensure a sufficient flow of credit to the economy.
The labour market signs of recent “cooling” in some countries has been evident; however, wage growth has not kept up with inflation and this has affected low-income households most of all. So, the Commission was calling national governance to support wage developments that mitigate the loss in workers’ purchasing power while taking into account competitiveness dynamics.
= Second, the Commission underlines key findings of the Alert Mechanism Report, with its focus on developments in macroeconomic imbalances: good news is that strong nominal economic growth has facilitated the reduction of debts by households, corporations, and governments. At the same time, the states 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-28, which needs a careful monitoring…
Main Commission’s concerns…
The Semester’s report acknowledges that, first, as regards external imbalances, 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 have returned…
Second, house price dynamics, and their possible spillovers into other sectors, remain a cause for concern in some states: despite the overall recent reversal in house price growth, property prices in some states continue to increase markedly and construction activity remains strong.
The Commission will again perform in-depth reviews for the 11 states identified last spring as having imbalances or excessive imbalances. In addition, an in-depth review will assess the risk of newly emerging imbalances in Slovakia.
Conclusion
The Commission Executive Vice-President Dombrovskis and Commissioner Gentiloni revealed the following assessments on 21 November 2023:
= The draft budgetary plans of seven EU states are in line with the Council Recommendations; other nine states which are not fully in line with the Recommendations are invited to address the specific issues emerging from the assessment. Lastly, the Commission considers that four draft budgetary plans risk not being in line with the Council Recommendations.
= Importantly, that all EU states have to preserve nationally financed public investment, alongside the support to investment provided by the RRPs. This is in stark contrast to the substantial cuts to investment that was seen in the wake of the financial crisis. Of course, determined implementation of the national RRPs remains of fundamental importance to sustain needed stability and growth.