Debate: European Semester for economic policy coordination  - European Semester for economic policy coordination: Employment and social priorities for
Date: TUESDAY, 14 MARCH 2023
Speaker: Irene Tinagli
Country: Slovenia
Language: EN

The EU was one of the most exposed advanced economies to downward risks, given its proximity to Ukraine and also the heavy reliance on energy imports, particularly on gas from Russia. The impact of high energy prices and the subsequent inflation led to the erosion of household purchasing power and industry competitiveness, in particular that of SMEs.  So, on the one hand, we all know that the low and stable inflation rate will be an important condition for long—term sustainable economic growth and so it is important to intervene on inflation. But, on the other hand, we also know that a reduction in aggregate demand, combined with the less favourable financing conditions, which are related, when you have high interest rates, could lead to a sharp decline in investment and therefore in future economic growth.  So investment in renewables and energy efficiency, for example, could also suffer, although these are precisely the investments required to reduce reliance on imported fossil fuels and structurally limit inflation driven by energy prices. So it’s quite a complicated conundrum.  These deteriorating economic conditions have increased the vulnerabilities and risks. The rising mortgage rates and the deterioration in debt servicing capacity resulting from the decline in real income of households may cause further distress for families and for financial markets in general. So against this background, we need to act. In our public debate, we always recall that the primary objective of the ECB is to maintain price stability, of course. But we should also recall that the aim of the Union as a whole should be to dampen the impact of current turbulences on the real economy and to minimise future risks, thereby defending the well-being of our citizens and preserving our production structure and the international competitiveness of our companies, as well as decent working conditions for our workers.  So in this regard, we need adequate and coordinated fiscal, structural and regulatory policies that complement the ECB’s monetary policy actions in order to support household incomes and provide targeted and temporary support to companies suffering from supply bottlenecks and high energy costs. The policy leeway created by the activation of the general escape clause was very important and was determinant in strengthening Member States’ economic and social resilience, both during the COVID pandemic and also in the last year after the war started.  The Commission released last week the fiscal policy guidance for 2024. However, we need more clarity as regards the medium and long term. This is why we call in this report for an urgent review of the EU fiscal framework, preferably to be completed prior to the deactivation of the general escape clause. The Commission’s communication of last November is an important step in the right direction. It addressed most of the concerns to emerge in the last years in the public debate, in particular as regards the simplification of the framework and the more tailor—made governance. The revised regulatory framework should allow Member States to have sufficient leeway to deliver decisive crisis resolution measures when they are needed and should preserve the flexibility already in—built in the Stability and Growth Pact.  Of course, there are some issues that are not addressed in the Commission communication, but which are important. For example, the issue of macroeconomic stabilisation is not properly addressed, and we believe that the Commission should build also on the positive experience we’ve had in the past years, for example with SURE. But most importantly, we hope that there will be a debate and that the Commission, the Council, will consider our contribution to the Semester cycle and the Commission will soon be able to bring forward legislative proposals on the reform of economic governance.