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EU likely to waive borrowing limits again in 2022

Jan Strupczewski
·2 min read

By Jan Strupczewski

BRUSSELS, Feb 26 (Reuters) - The European Union is likely to waive limits on government borrowing again in 2022, given persistent uncertainties about the pace of economic recovery once the coronavirus pandemic is contained, officials say.

The European Commission will set the criteria on March 3 for a recommendation later in the year on whether the bloc's fiscal rules should be reinstated in 2022 or stay suspended.

Both options remain possible. But European Economic Commissioner Paolo Gentiloni told a European Fiscal Board conference on Friday that, in terms of fiscal support under current conditions, "the risks of doing too little outweigh the risks of doing too much."

The EU's biggest fiscal hawk, Germany, has already decided to extend that principle into next year.

Both Social Democrat Finance Minister Olaf Scholz and Christian Democrat Party leader Armin Laschet say the country's debt brake should stay suspended in 2022, and maybe beyond.

The EU's fiscal rules require governments to strive towards budget balance in structural terms and cut debt every year until their debt-to-GDP ratio reaches 60%.

But with EU governments putting up trillions of euros to keep their coronavirus-ravaged economies going, the rules were suspended at the start of the pandemic under a "general escape clause" built into them.

The final EU decision on whether to restore borrowing limits will come in May.

With one eye on German federal elections in September, Scholz will meanwhile will present his draft budget for 2022 as soon as next month, and officials say steep spending cuts are unlikely.

Commission forecasts show the EU economy will not return to pre-crisis levels before the middle of 2022, and governments expect a wave of bankruptcies as soon as they start withdrawing the blanket financial help being offered now.

Euro zone officials said the fiscal rules should be suspended until the economy returned to pre-crisis levels.

"De-activating the General Escape Clause at the end of 2021 and returning to the current fiscal rules would have very negative effects on sustainable growth," one senior euro zone official said. (Reporting by Jan Strupczewski; editing by John Stonestreet)