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EU calls for fiscal prudence

EU calls for fiscal prudence

Talks on the new Stability Pact of the European Union got under way last week at the Eurogroup and are expected to last until October at least, with the direction being toward greater flexibility. Regardless of the outcome of the discussions, however, Athens has been asked to demonstrate fiscal prudence starting this year.

There are various camps within the Eurogroup between those wanting more and those seeking less relaxed rules, and Greece is the country with the greatest interest in flexibility, due to its high debt.

The existing rules would have put a chokehold on the Greek economy, as they would have required primary budget surpluses of 6%-7% every year. Even if the debt limit rose to 100% of gross domestic product, Greece would still need a primary surplus of 4%-5% of its GDP.

A new framework that would be lenient enough for Athens would require a primary surplus of 2% of GDP. This is the government’s aspiration, though it is still too early to assume this will be the case. The European Commission will issue directions for the 2023 budgets in April, which will also be an indication of the course of the Stability Pact changes. Greece would also like an exemption for defense spending, though this is a position that will be a tough sell.

The only thing that is certain, is that the government will be asked to return to fiscal discipline this year. The messages it has received ahead of Greece’s upcoming emergence from enhanced surveillance status indicated that it should show prudence and avoid the policy of support measures unless they are targeted and essential.

The Finance Ministry appears to have committed itself to a primary budget deficit of just 1% this year so that in 2023 the budget reverts to a primary surplus.

After all, government officials consider that with 2023 being an election year, it would make sense to avoid exhausting the budget spending margin and the European Commission’s tolerance this year, or risk the country missing its investment grade target.