Assessment of the fiscal stance appropriate for the euro area in 2024

On 28 June 2023, The European Fiscal Board (EFB) published its assessment of the appropriate fiscal stance for the euro area in 2024. The report recommends a restrictive fiscal impulse and considers that adjustment remains particularly important for high-debt countries. The war in Ukraine aggravated inflation and triggered a terms-of-trade shock larger than that experienced during the oil crises of the 1970s, reducing euro area real income by more than 2% of GDP in 2022. However, with the help of the counter terms-of-trade shock as energy prices receded, EU and national efforts to contain the economic crisis have subsequently been successful overall. In 2024, growth is expected to remain solid and labour markets exceptionally tight. In view of the announced deactivation of the severe economic downturn clause at the end of this year, the Commission’s surveillance package adopted in May includes specific quantitative fiscal guidance for 2024 in line with current fiscal rules. This guidance implies a restrictive fiscal impulse of close to 0.5% of GDP for the euro area, without taking into account the recommended phase-out of energy support measures estimated at 1 ¼ % of GDP. At the same time, based on current policies, the Commission projects a reduction in discretionary fiscal support 0.8% of GDP in 2024. Professor Niels Thygesen, Chair of the EFB, stated: “The Commission guidance would imply that Member States use part of the roll-back of energy measures for new fiscal initiatives. The EFB considers that such developments would not amount to an appropriate fiscal stance for the euro area”. He clarified: “Barring new negative developments, an improvement in the structural primary balance beyond the 0.8% of GDP projected by the Commission would appear to be appropriate, with a country distribution of extra efforts linked to well-identified fiscal risks.” The recommended fiscal impulse can help mitigate inflationary pressure and facilitate the ECB’s effort to achieve its inflation target.