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Extraordinary measures to combat the new coronavirus pandemic have aggravated macroeconomic imbalances in several countries of the European Union, including Portugal, the European Commission warned on Wednesday, which again recommended “prudence” in crisis management so as not to endanger the sustainability of public finances.
As one of the twelve countries in the European Union where there are “excessive imbalances”, Portugal will be subject to an in-depth evaluation by the Commission services, to “identify and assess” the seriousness of the impact of the measures implemented. in response to the pandemic situation. in public accounts, the Commission announced at the presentation of the autumn package of the European Semester.
This report will be released in April 2021, but the community executive has already detected some trends: the ongoing fiscal consolidation effort has stopped and the correction path has been reversed, with a sharp increase in the level of public debt and private. Furthermore, the response to the crisis has deepened the divergence between the different Member States.
“The crisis has exacerbated some of the existing challenges and is creating new risks. It is a situation that reinforces the need to make the best possible use of the European Union’s support measures, ensuring that investment and the reforms planned in the euro area make it possible to correct imbalances, ”the Commission writes.
Portugal within the recommendations
In the specific case of Portugal, the community executive indicates that the “main challenge” is to respond to the negative consequences of the pandemic, “in human and economic terms.” Brussels notes that most of the measures adopted by the Government with budgetary impact are of a temporary nature, which goes against the recommendations issued in July.
In fact, Portugal even stands out as one of the countries that best followed the recommendation, to focus action on extraordinary and short-term emergency measures, such as increased funds in the health sector or support for maintaining employment.
The services consider that the national response has been able to “help” the coup caused by the pandemic, and that the country has been carrying out “active debt management” that has allowed it to keep interest costs low.
But in the conclusions of another post-program financial assistance follow-up mission, he points to the country’s low level of investment and productivity as a possible obstacle to recovery from the crisis. Therefore, Brussels advises that greater attention be paid to measures to promote and support economic activity in the medium term.
The in-depth report on the Portuguese macroeconomic situation will be presented at the same time as the Commission’s assessment of the national recovery and resilience plan, under which the country will be able to receive up to € 14 billion in cash for reforms and investments. This document will replace, next year, the usual assessment carried out by Brussels on the stability program and the country-specific recommendations issued in the European Semester.
At the press conference to present the autumn economic policy package, Commission Executive Vice-President Valdis Dombrvskis and Economy Minister Paolo Gentiloni called on Member States to follow the strategic guidelines and priorities of the ecological transition and digital data of the European Union in their national plans.
“I encourage all Member States to define ambitious programs. For Europe to once again become a competitive force on the world stage, we need tailored and temporary budget support measures, as well as well-chosen reforms and investments that lead to a fair, inclusive and sustainable recovery, ”said Dombrovskis, who left. It remains a strong call for the political responsibility of European leaders to quickly pass the regulation of the future Recovery and Resilience Mechanism which he described as “a financial anchor during this storm”.
With the activation of the repeal clause of the Stability and Growth Pact (PEC), which will continue to be suspended for next year, the Commission has not been able to assess the value of the deficit (which according to the regulations cannot exceed 3% of the Domestic Product Gross)) and the level of indebtedness (which is recommended not to exceed 60% of GDP).
The burden of debt
In all EU countries, there was an increase in public debt, justified by the urgency of combating covid-19, but also explained by the effect of the fall in GDP. This means that this increase could be partially corrected next year, if economic growth forecasts come true.
But Brussels does not exclude that countries that before the crisis already had worrying levels of indebtedness, such as Portugal, may have to make a new adjustment effort to stabilize their budget exercises in the medium term.
“Taking into account the level of public debt and the important sustainability challenges in the medium term even before the pandemic outbreak of covid-19, it is important to ensure that the supportive budgetary measures adopted preserve fiscal sustainability in the medium term”, recommends the Commission, in its opinion on the draft budget plan for 2021 sent by Lisbon.
A warning that did not follow only for Portugal: countries such as Spain, France and Italy must be especially cautious in their policies, so as not to compromise obtaining their financing and their debt service capacity.
In addition, Paris and Rome (and Bratislava and Vilnius) received an additional warning, as their budget plans include several measures that “do not appear to be temporary or are accompanied by compensatory measures” and may have a negative impact on macroeconomic conditions.
However, while warning about the need to guarantee the sustainability of public accounts, the Commission observes that current circumstances still force countries to operate in an emergency context, and that the conditions for withdrawing the measures are not met. extraordinary or return apply the PEC budget discipline rules.
