Debate: European Semester for economic policy coordination: annual sustainable growth survey  – European Semester for economic policy coordination: employment and social aspects in the annual sustainable growth strategy survey
Date: WEDNESDAY, 9 MARCH 2022
Speaker: Irene Tinagli
Country: Slovenia
Language: EN

When the Semester cycle started, the economic situation we faced was quite positive and expectations were good, although we still started to notice that were some elements that could have jeopardised the strength of the recovery in 2022. First of all, we had problems of labour shortages that have involved many service sectors in the reopening phase, that in the coming months could have affected other sectors, like logistics, transport and activities related to information technologies. Second, we were still dealing with COVID. We were still dealing with the new variants, we were afraid of new waves, and there were low rates of vaccination in some parts of the world and of Europe as well. Last but not least, we started to observe a sharp rise in energy prices and, for this reason, also of the inflation rate. The succession of these elements could of course have led to some slowdown, but with an adequate policy mix and a full coordination of monetary and fiscal policy action, both at the European and national level, we were optimistic and positive that we could preserve the good prospects for 2022. And then the war. The war has drastically changed this scenario. The tough but necessary sanctions against Putin’s regime are the right response to his barbaric attack on Ukraine, but we know they will have an important impact on our economies. We are, of course, willing to shoulder these costs. We will. We have to. But we have to be ready. We have to prepare. If the situation in Ukraine does not improve, we could have considerable consequences on the availability of some goods and above all, of course, energy products. This will result in an increase not only of energy prices, but also of the prices of other important commodities that will affect various sectors like agriculture, food industries and others. In this regard, I see three possible risks that we have to be aware of and prepare to address. The first relates to the ability of the downstream market to absorb price increases. The risk that I see is that this could lead to a slowdown in aggregated demand, delaying the time of recovery or slowing it down compared to what we expected before. The second factor is the possible effect on wage dynamics, which could occur, of course, if the shock were to extend over a longer period of time. This will also have an impact on inflation. The third factor is that a prolonged energy crisis and, in particular, a possible asymmetric effect in energy costs for the Union would also lead to a loss of competitiveness for European industry and also to divergences in the single market. On top of that, a prolonged phase of tension on energy prices would have consequences not only on inflation, as we have seen in the past months, but also on industry costs by influencing the investment decisions of manufacturing companies. Therefore the risk is that we could see a phase of investment postponements or rescheduling. This is possible despite the high level of current demand. So against this complex and worrisome background, I really think that all policy tools should be used to manage this delicate phase and to do it in the most appropriate, incisive way. First, EU institutions will have to empower EU governments to rise to these epochal challenges. This is why I welcome the European Commission’s willingness to adapt its fiscal guidance for 2023 to the new realities. This is not the time to go back to fiscal rules that were meant for completely different moments. They are not adequate to face the challenge that we have ahead and we need to support Member States in keeping people safe and confident for the future. But second we also need to put in place an EU response, EU tools, as we did for COVID. We usually say that we have to learn from past mistakes, but sometimes we also have to learn from what worked, from past success. If we look back at how we managed the COVID crisis, if we look back at what worked, the key factors that explain the EU success in managing the consequences of the COVID crisis were putting in place the right policy mix, balancing monetary policy, fiscal policies and effective coordination in the policy actions of Member States, and the introduction of new European tools that were adequate to the challenge that we faced, tools that made us stronger, more united, and that allowed us to go back to a pre-crisis level of growth much faster than anybody would have thought. So let us approach this new phase with the same spirit, and I’m sure we can make it.