Opinion of the European Economic and Social Committee on the Recommendation for a Council Recommendation on the economic policy of the euro area

(COM(2020) 746 final)

(additional opinion)

(2022/C 105/28)

Rapporteur: Kristi SÕBER

Bureau decision 26.4.2021 Legal basis Rule 32(1) of the Rules of Procedure and Rule 29(a) of the Implementing Provisions of the Rules of Procedure Section responsible Economic and Monetary Union and Economic and Social Cohesion Adopted in section 5.10.2021 Adopted at plenary 20.10.2021 Plenary session No 564 Outcome of vote (for/against/abstentions) 166/2/1

1. Conclusions and recommendations

1.1. The European Economic and Social Committee (EESC) is well aware that the pandemic is not over yet and that its economic impacts will last for several years and need a specific, new emergency economic policy mix. The EESC welcomes the most recent forecast by the European Commission indicating that, from 2021, the EU and euro area economies will accelerate fast again (and preliminary data confirm that), especially thanks to the recovery of investment, strongly supported by utilisation of NextGenerationEU (NGEU), in particular the Recovery and Resilience Facility.

1.2. At the same time, the EESC acknowledges that the EU is going through the most serious period in the economic history of European integration, which is affecting private consumption and investments, as well as foreign trade performance. At this critical time, only government expenditures can help to alleviate the situation.

1.3. In this specific and unique situation, it was necessary to create a new emergency economic policy mix to address the crisis. The EESC appreciates the fast reaction at EU as well as at Member State level and welcomes the fact that the twin transition process has become a substantial part of the recovery effort and strategy.

1.4. Especially in the first half of 2020, the Coronavirus Response Investment Initiatives helped alleviate the very difficult economic circumstances, mainly by stabilising markets, jobs and personal incomes. This first step was followed by the NGEU, the robust and most innovative fiscal contribution, directly reacting to the effects of the pandemic. The EESC warmly welcomes both initiatives as a fast and flexible response to the pandemic.

1.5. The EESC is well aware of the different positions and impacts of the pandemic that caused wider divergence among Member States. The EESC calls for consideration to be given to the phenomenon of divergences across the euro area and for a prudent response to be given to the significantly worsened fiscal performance, and within a common framework, the Committee welcomes the flexibility adopted in tailor-made national economic policies and recovery programmes that respect the specific needs of Member States. This flexibility is also recommended for the implementation of the Recovery and Resilience Programmes.

1.6. The EESC underlines the need to achieve a new balance between monetary and fiscal policies and to eliminate the identified macroeconomic imbalances in the coming period. The EESC is aware of the significant rise of debt-to-GDP ratios in the last year. After economic recovery has taken hold, the reduction of debt-to-GDP ratios must be done in a way that promotes inclusive growth, avoids social injustices, negative effects for companies and on the labour market.

1.7. The EESC respects and understands that the post-COVID-19 recovery will be extensively accompanied by structural policy measures ( 1 ) that will mainly be in line with the EU Green Deal. In this regard, the EESC supports the links between the recovery process, fiscal consolidation and green budgeting practices.

1.8. The EESC firmly believes that the lessons from the pandemic should be reflected in the overall effort to contribute to the economically effective, socially fair and environmentally sustainable development of the EU and the euro area in the long run.

1.9. Contrary to the previous crisis in 2009-2011, where the banking and financial sectors were one of the triggers of the consequent recession, this time the EESC welcomes the good and healthy shape of the banking and financial sectors, which has helped to overcome this difficult situation more smoothly.

1.10. The EESC respectfully calls for the integrity of the single market to be maintained and for any signs of its fragmentation to be prevented, as a fundamental condition for the future positive performance of the EU and euro area economies. This integrity should be further supported through suitable progress in the development of the Banking Union and the Capital Market Union.

1.11. The EESC acknowledges and respects that some important lessons from the previous crisis were learnt and were used to support macroeconomic stability, and calls upon the responsible EU institutions to improve the EU’s economic policy governance and to ensure that the lessons learnt from the pandemic are consequently reflected in continuous reform efforts.

2. Background and context

Current macroeconomic performance and outlook

2.1. The COVID-19 pandemic has caused a sudden and deep economic depression but, in 2020, the drop in GDP was ultimately slightly less than originally expected. The decrease was bigger than in the last economic crisis (in 2020, the euro area economy dropped 6,5 % year-on-year, compared to 4,5 % in 2009; the EU economy decreased by 6,0 % year-on-year in 2020, compared to 4,3 % in 2009; both the EU and euro area economies are expected to grow by 4,8 % in 2021). Therefore, we are facing an exceptional economic situation and Europe’s worst economic performance since the Second World War.

2.2. In 2020, both private consumption and investments have dropped substantially (both 7,4 % year-on-year) and foreign trade has also been severely hit. Only government expenditure in 2020 grew slightly in a year-on-year comparison (1,3 %). Until now, due to the emergency measures, neither mass job losses nor large income losses on the scale of the 2008 crisis have been experienced. However, considering the substantial decline in economic activity, this means that productivity has been reduced as well.

2.3. 2021 is generally considered to be a year of recovery (due especially to the growth in investment activities, which is forecast by the European Commission to reach 6,2 %), yet it continues to be fraught with uncertainty due to the impact of the pandemic on and the behavioural changes of economic agents.

Emergency economic policy mix

2.4. Because of the pandemic, a new emergency economic policy mix had to be created to provide an immediate but also a medium-term response to the shock. Its main priority is to deal with, eliminate and lessen the economic and social consequences of the pandemic and to keep Europe in a competitive and sustainable path.

2.5. Another integral part of the medium-term and longer-term response to the pandemic, and the recovery, reconstruction and resilience effort (3R strategy), is the twin transition process (green and digital), with its strong focus on social considerations and respect for the rule of law and other fundamental EU values. Moreover, the EESC calls for a greater focus on combating inequalities and tackling the consequences of the crisis, particularly for the most vulnerable.

Monetary policy

2.6. The ECB is continuing its highly expansionary policy as a targeted response to the pandemic. Recently, however, the ECB announced that favourable financing conditions could be maintained with a moderately lower pace of net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) than in the previous two quarters.

Fiscal stance and fiscal consolidation

2.7. The Coronavirus Response Investment Initiatives (CRII and CRII+), which redirected and reallocated cohesion policy funds, greatly helped to compensate for and offset the negative consequences, to stabilise markets and protect jobs and personal incomes.

2.8. The most innovative instrument invented, developed and currently being implemented as a direct response to the COVID-19 pandemic is undoubtedly the NGEU programme, whose main aim is to mitigate the negative impacts of the pandemic.

2.9. The expansionary fiscal stance of NGEU has been exceptionally and temporarily supported through the activation of the Stability and Growth Pact’s general escape clause.

2.10. However, along with measures taken at national level, the fiscal engagement has been costly and has led to the deterioration of fiscal indicators.

2.11. A feasible reduction of debt-to-GDP ratio must be done in a way that avoids social injustices and undue negative effects on the labour market. To improve fiscal indicators, an inclusive and sustainable growth strategy is crucial.

Structural policy and regulatory measures

2.12. The COVID-19 pandemic has revealed some serious structural failures in the functioning of European economies and societies. The lessons to be learnt after COVID-19 therefore include not only establishing a new normal, but also implementing measures making the economic and societal systems more resilient (which already presupposes less fragility and vulnerability). This includes not only the milestones for a socially fair twin transition, and more efficient and interconnected healthcare systems and distribution of medical services across Europe, but also support for a more competitive euro area inside and outside of Europe, including strategic investments supporting European industry and strengthening the EU’s position in a global context.

2.13. In the first phase of the pandemic, the single market was severely affected, with traditional trade flows interrupted between and even within the EU Member States due to the severe restrictive measures. The situation has been resolved by the intervention of the European Commission, which established green corridors.

Financial intermediation

2.14. The EU and euro area banking and financial sector has proved its strength and resilience, thanks to the new regulations and rules adopted after the previous crisis. Currently, the sector is stronger in terms of its capital equipment and the health of its portfolio. However, there may be some risks relating to the solvency of its clients that might lead to more non-performing loans.

Governance

2.15. The current crisis has reminded us of the incomplete architecture of the EU’s economic governance framework. With the Recovery and Resilience Facility, the nature of the European Semester has fundamentally changed: since the disbursement of funds is linked to the implementation of the country-specific recommendations, these have become more politically binding. Civil society should be more involved in the European Semester process. The partnership principle, which has a long tradition in cohesion policy, should serve as a blueprint for an effective tool of civil society involvement.

3. General comments

3.1. The EESC acknowledges that the recovery scenarios will depend heavily on the intensity of the pandemic and on the success of the vaccination campaigns, structural aspects (for example, the performance of sectors that have been mostly or completely affected, such as tourism, hospitality, transport, culture and leisure and their weight in the economy). The potential flexibility in fiscal policy to enable compensatory measures to be adopted and the efficiency of these measures will also be key.

3.2. The EESC regrets that the economic impact of the pandemic has led to wider divergences across the euro area economies in terms of economic performance, fiscal indicators, inflation and external balance. This could strongly influence the economic and social situation and the competitiveness of the affected economies and the euro area as a whole, as well as internal and external imbalances.

3.3. The EESC appreciates the very comprehensive and quite flexible response of the main EU economic policy actors to the pandemic, namely the European Central Bank (with its purchase programmes and key interest rates), the European Stability Mechanism (ESM — with its macroeconomic stability support instruments) and the Commission (with its very innovative NGEU initiative, supplemented by other emergency steps like CRII(+), SURE, flexibility in fiscal and State aid rules as well as in financial regulation, and other exceptional measures giving the Member States the necessary flexibility to adopt the required crisis management measures).

3.4. The EESC is convinced that the outcome of the emergency economic policy mix is crucial. Essentially, a common and coordinated accord must be reached between monetary policy and fiscal policy responses. Relevant reforms must be adopted to support a sustainable recovery (through measures for clean energy, digitalisation, innovation and circular economy, among others). The impact of NGEU and its interaction with other economic policies are important, especially in countries receiving large funds.

3.5. The EESC appreciates that the emergency economic policy mix also contains some limits to prevent any future negative consequences for price stability and fiscal discipline indicators in the medium and longer term as a result of the current expansionary policies. In particular, the future development of public finances is subject to high risks. In this context, the EESC highlights the need for a fair and sustainable taxation policy by, among other things, combating tax fraud and aggressive tax planning.

3.6. The EESC expects the NGEU not only to bring the euro area and EU economies back to their pre-pandemic levels, but also to support important structural policy measures, mainly towards a green and digital transition, taking due account of employment and social concerns. With respect to NGEU, the EESC appreciates that the EU has managed to adopt such a wide-ranging step in such a short time but also considers it necessary to strive to tackle possible shortcomings, such as insufficient consultation of civil society in the development of the National Recovery and Resilience Plans.

3.7. The EESC is aware that another innovative tool designed and implemented as a direct response to the pandemic is SURE, which aims to support governments in their efforts to protect jobs and personal incomes.

3.8. The EESC recommends that the next fiscal consolidation respect the green budgeting practices ( 2 ) and green public investment support, so as to contribute to the EU Green Deal and a healthier EU fiscal situation. The EESC is well aware of the considerable negative impact of the current crisis on public finances.

3.9. While the EESC warns against the premature deactivation of the general escape clause ( 3 ) , it will be necessary to focus on fiscal sustainability once the pandemic has clearly ended and the recovery is well underway. Then fiscal policies and instruments should be refocused so that appropriate strategies are adopted in the medium and longer term. The EESC welcomes the Commission’s decision to restart the review on the EU economic governance framework in autumn 2021. Fiscal rules should only be fully applied after having been revised. So instead of a ‘return’, the EESC recommends a ‘turn’ towards a revised economic governance framework ( 4 ) . In the EESC’s view, any future fiscal framework needs to be investment-friendly, through the implementation of a golden rule for public investments without jeopardizing medium term fiscal and financial stability, promote growth and enable Member States to implement a counter-cyclical policy in times of economic downturn.

3.10. The EESC is in favour of reforms for more efficient and fairer public revenue systems that shift taxation away from labour and productive investments, and focus more on environmental taxation and pricing externalities and on a more efficient and improved incentive structure to limit tax avoidance practices.

3.11. The EESC appreciates that the EU and euro area banking and financial sectors are in much better shape compared to the previous crisis; specifically, they are less vulnerable and more resilient. However, at the same time, the EESC recommends not underestimating some of the solvency risks that may result from losses of revenue suffered by the sectors’ clients. This could result in more non-performing loans on banks’ balance sheets. The EESC is pleased that the euro area banking sector has proved its stability and so far has not been significantly affected by the crisis.

3.12. The EESC firmly believes that the smooth functioning of the single market also means more resilient and efficient euro area and EU economies as a whole. The Committee also deems it particularly important to complete the single market in order to limit economic inflexibilities and imperfections.

3.13. The EESC welcomes the specific economic policy mix that was adopted last year to provide an immediate response to the pandemic and that was continuously adjusted to reflect the evolving situation. The EESC considers that the EU’s response measures could effectively mitigate the potential negative long-term impacts of the crisis on the economic performance of the euro area and the EU, and on the EU’s labour markets, and could lessen the widening of economic and social divergences. At the same time, it is crucial to address the substantial imbalances in order to effectively cover significant macroeconomic risks, including risks of rising inequalities.

3.14. The EESC firmly believes that well-functioning healthcare, social protection and emergency systems are crucial for positive long-term sustainable economic development. The pandemic has revealed and reinforced this link, which should consequently also be reflected in the implementation of the European Pillar of Social Rights.

3.15. The EESC strongly recommends continuing efforts to complete the architecture of the Economic and Monetary Union, including adapting the European Semester to the NGEU programme, completing the Banking Union and Capital Market Union and revising the economic governance framework. It should be considered whether the design of the NGEU could also be an example as to how common EU financial resources could be mobilised and used in the future.

3.16. The EESC points out that the main package of measures to address the negative impacts of the pandemic was prepared in the first half of 2020, thus just before the most severe effects of the pandemic were felt in most Member States. Therefore, an evaluation of the relevance and adequacy of the measures adopted could be considered. Planning plays a key role in anticipation, which will enable responses to continue to be given to the new reality caused by the pandemic, which is far from being overcome, making permanent planning necessary.

4. Specific comments

4.1. The EESC appreciates the Commission’s publication of seven flagship initiatives to serve as guidelines for practical implementation of the Recovery and Resilience Facility (RRF) in individual Member States. It is very important that these initiatives be consistent with the challenges and priorities identified for the post-COVID-19 recovery in the Council Recommendation on the economic policy of the euro area.

4.2. The EESC acknowledges the very supportive role that the European Investment Bank’s pan-European Guarantee Fund has played in protecting and boosting the business sector in the euro area and the EU as a whole.

4.3. With regard to the recovery, the EESC proposes focusing on economic growth and social justice, which will translate into higher income and GDP. A sustainable fiscal stance, with a view to reducing the burden for future generations and limiting the risk associated with higher interest rates or lower production, requires a bigger increase in economic activity, which could be enabled through (a) strengthening public investments and (b) reforms that support the transition towards a green and digital economy.

4.4. The EESC acknowledges and respects that some important lessons from the previous crisis have been learnt and used to support macroeconomic stability, and strongly believes that the lessons learnt from the pandemic should consequently be reflected in continuous reform efforts focused on reducing the administrative burden on businesses through the digitalisation of public administrations, of SMEs and of the business sector as a whole, electronic identification and more effective justice systems.

Brussels, 20 October 2021. The President of the European Economic and Social Committee Christa SCHWENG

(1) ECB definition in: ECB Occasional Paper Series Structural Policies in the Euro-area; June 2018: Structural economic policy = Economic policy measures adopted for labour, product and financial markets to improve institutional and regulatory frameworks to strengthen conditions for long-term growth and ensure desirable distribution effects.

(2) Discussion paper, Elva Bova (2021), Green Budgeting Practices in the EU: A First Review.

(3) OJ C 429, 11.12.2020, p. 227.

(4) OJ C 429, 11.12.2020, p. 227, and EESC own-initiative opinion on reshaping the EU fiscal framework for a sustainable recovery and a just transition (ECO/553), see page 10 of this Official Journal.