European Union nations must ensure they don’t let up in the fight against inflation at a time of high economic uncertainty.
In policy recommendations to be given to member states on Wednesday, seen by Bloomberg News, the European Commission, the EU’s executive arm, will tell national governments that “it will take time for price pressures to disappear” so “combating inflation remains a key policy priority in the coming period.”
Officials reiterated that fiscal measures taken to aid consumers and businesses through the energy crisis should be phased out this year, and that they should revert to prudent policies for their public finances to ensure long-term debt sustainability.
The annual recommendations to capitals around the region differ from last year’s by elevating inflation as a key challenge for governments to help tackle.
A turbulent geopolitical context, the ensuing energy crisis and implementation of the EU’s unprecedented 800 billion euro ($862 billion) recovery fund have been dominant themes since the last report.
The draft says that the EU economy showed “remarkable resilience in a challenging environment marked by Russia’s unprovoked invasion of Ukraine.”
“Inflation is projected to continue declining, but core price pressures are proving more persistent, impacting on businesses and eroding households’ purchasing power,” the Commission wrote. Moreover, “recent increases in interest rates have raised concerns about pockets of vulnerability in the financial sector, calling for careful monitoring.”
The Commission noted that the high inflation, now at 7%, is the backdrop against the fiscal and macroeconomic imbalances are now evolving. In addition, “inflation divergence across Member States is at historically high levels,” representing a risk for the euro area.
“Inflation differentials are a heightened concern within a monetary union and that calls for special attention,” the draft document says. It’s still subject to changes before adoption on Wednesday.
The Commission also conducted an in-depth assessment of a majority of the national economies, including the largest ones.
Officials found that Germany, Spain, France and Italy, among others, did not conform with the deficit limit of 3% of gross domestic product. Given the pressures of the war in Ukraine and the aftermath of the pandemic, the Commission doesn’t propose to take any action.
Officials are urging member states to continue implementing the reform and investment plans agreed to unlock recovery funds, given that some member states are facing difficulties to fulfill the agreed calendar.
While the implementation of the plans “was broadly on track as of the end of 2022, some member states are facing challenges in administering funds, due in part to limited administrative capacity or investment bottlenecks.”
Although the ongoing revision of the plans could represent an opportunity to address some of the issues, the institution also warns that the process will have impact the disbursement schedule of recovery funds in 2023 and beyond.