EU Fiscal Board Warns Against Relaxing Fiscal Rules for Energy Spending
European Fiscal Board Criticizes Commission's Fiscal Flexibility for Energy Transition
BRUSSELS, June 10 (Reuters) - The European Fiscal Board, the EU's independent watchdog, criticised on Wednesday the European Commission's move to allow some of the fiscal leeway granted last year to governments for defence, to be spent on the transition to clean energy.
Background: Fiscal Leeway for Defence Spending
Last year, the Commission said EU governments could spend an extra 1.5% of GDP each year for four years on defence capabilities to deter an attack from Russia, without getting into trouble with EU fiscal rules that set the maximum budget deficit at 3.0% of GDP. This is made possible by invoking a national escape clause for events outside the control of the government.
Italy's Push for Energy-Related Fiscal Flexibility
But Italy, which sees no big risk from Russia but struggles with high fuel prices as a result of the U.S.-Israeli war on Iran ahead of elections next year, has been pressuring the EU executive to grant it fiscal leeway to ease the pain of expensive energy.
Commission's Response to Italy's Request
Last week the Commission yielded, agreeing 0.3% of GDP of the 1.5% of GDP annual defence leeway could be spent to help the transition away from fossil fuels.
European Fiscal Board's Warning
Chairman's Statement on Fiscal Credibility
“The energy shock is real, but it calls for transformation, not stimulus,” European Fiscal Board Chairman Pieter Hasekamp said in a statement. “Fiscal credibility, built through adherence to agreed expenditure paths, is our best protection against rising borrowing costs. Support for households and businesses must be temporary, targeted, and offset - not a backdoor to broader loosening.”
Concerns Over Fiscal Discipline
The EBF said that despite the high energy prices, governments should stick to their net expenditure paths agreed with the Commission in their 4- to 7-year plans to bring down debt, noting most EU countries still had some of the pandemic-era and energy crisis fiscal stimulus to roll back while debt and deficit levels were higher than five years ago.
Risks of Extending Escape Clauses
"Extending the (national escape) clauses (to energy) sends the wrong signal. The EFB is concerned that the new flexibility, once granted, will be applied well beyond what is strictly necessary - repeating the mistakes of the 2022–2023 energy crisis, when broad-based and untargeted support persisted long after energy prices had normalised," the EBF said in a statement.
Potential Impact on Fiscal Policy
"More generally, offering exemptions whenever there are political pressures to increase certain expenditure categories fortifies the unfortunate notion that, after all, there are no trade-offs in fiscal policy," the EBF said.
Recommendations for Future Fiscal Policy
The EBF said that should oil prices remain high for longer and economic growth slowed down further beyond the current forecasts, governments should first of all focus on protecting public investment, rather than spending to uphold consumer demand.
(Reporting by Jan Strupczewski)
