With persistent upward pressure on prices, the European Commission has urged EU countries to reduce their public spending to avoid further fuelling inflation, notably by phasing out energy aid granted to households.

While energy prices at wholesale markets have returned to pre-2022 levels after spiralling following the Russian aggression in Ukraine, so-called “core inflation”, which measures price increases for goods outside the energy and food sector, has been higher than expected.

In March 2023, core inflation reached a record level of 7.6%, meaning that is now the main driver of overall inflation, replacing energy costs, according to data from the European Commission.

“While headline inflation continues declining, core inflation is proving more persistent,” Valdis Dombrovskis, executive vice-president of the European Commission, told journalists on Wednesday (24 May).

To tackle overall price rises, it would therefore not be sufficient to only rely on the European Central Bank, which has reacted by increasing interest rates to reduce investment activity, the Commission argues.

In its so-called European Semester Spring Package, an annual recommendation given to EU countries for next year’s budget, the Commission thus urged governments to reduce public spending, to not further fuel price pressures.

“Fiscal policy should not contradict monetary policy,” Dombrovskis said. “Therefore, we are calling for a more prudent fiscal stance of member states,” he added.

The reduction of public spending should primarily happen by phasing out energy aid measures taken by EU countries in order to protect their citizens from spiralling energy prices after the start of the war in Ukraine, the Commissioner said.

“As a first step, this means that member states should wind down the support measures related to the energy price shock,” Dombrovskis said. “And to be clear: these savings should be used for reducing deficits, not for more spending,” he said.

What should not be cut back, however, are public investments, which the Commission sees as necessary as Europe wants to achieve climate neutrality and improve its competitiveness.

As they stand, green investment needs in the EU are eye-watering. On Monday (22 May), economists Jean Pisani-Ferry and Selma Mahfouz published a report for the French government, estimating the need for additional investments per year at €70 billion for France alone.

“In the coming years, if not decades, we are going to face major investment needs, both regarding the green and digital transitions of the economy,” Dombrovskis said, though he cautioned that “the solution to every problem cannot be just to pile up more debt”.

Speaking off the record, a high-ranking Commission official warned that member states should “not fall and repeat the trap that Europe experienced during the financial crisis when public investment was the first victim of consolidation strategies”.

During the 2010 eurozone crisis, investments were the first to go in terms of public spending cuts by European governments, as this was politically easiest.

Economy Commissioner Paolo Gentiloni, who has supported measures to protect investments in the past, admitted that reducing public spending while maintaining public investments needed for economic growth was “a difficult couple”. Nevertheless, he said it is a combination that needs to be done.

EU economy commissioner: Debt rules have cost us growth

European Economy Commissioner Paolo Gentiloni and German Finance Minister Christian Lindner on Monday (30 January) clashed over EU rules for national public debts and deficits, which the Commission wants to make more flexible, while Lindner insists on “verifiable” rues.

Return to old debt rules, while reform is underway

The recommendations come amid a discussion on reforming the EU’s rules for national debt and deficits.

The current rules have been criticised as forcing member states towards unrealistic budget cuts in order to reduce public debt levels.

While the rules have been deactivated during the COVID pandemic and the subsequent energy crisis, from next year onwards, the old system will again be activated – while negotiations between the member states regarding the reform are ongoing.

In its proposal to reform the regime, the Commission suggested the implementation of more country-specific debt reduction paths for each member state, in order to give highly-indebted countries more time to reduce their debt and allow for necessary investments.

The country-specific recommendations “take into account those elements of our reform proposals that are consistent with the current rules”, Gentiloni said.

Commission inches towards Berlin in EU debt rules proposal

The European Commission presented its legislative proposals for a reform of the EU rules for national debts and deficits on Wednesday (26 April), moving closer to the position of Germany but keeping the key concept of country-specific debt reduction plans.

Trade unions warn of “new wave of austerity”

While public deficits would currently be above the target of 3% of GDP in several member states, the Commission said it would not open up any excessive deficit procedure right now. However, if national governments fail to follow its recommendations on reduced public spending, they might do so in 2024, the Commissioners said.

“Member states should bear this in mind while carrying out their 2023 budgets and preparing their budgets for next year,” Dombrovskis said.

Across the EU, governments have already announced plans to reduce public spending, with mixed reactions.

While the Spanish government said it was able to reach the 3% deficit target in 2024 “without cutting policies” thanks to the economic growth of the country, in Czechia, announced austerity measures have already caused protests by trade unions.

Similarly, French trade unions have warned of “a new wave of austerity” as Economy Minister Le Maire announced plans to speed up debt reduction to bring deficit levels below the 3% targets by 2027.

However, in Germany, Finance Minister Lindner said last week that he felt encouraged by the Commission’s recommendations in its course to cut public spending, and that “times of expansive fiscal policies are over”.

German finance minister: times of expansive fiscal policies are over

Fiscal tightening would be necessary to fight inflation, said Finance Minister Christian Lindner following the recent reports of the International Monetary Fund (IMF) and the EU Commission, which indicated that Germany will continue to be plagued by high inflation.

On Monday, …

Read more with EURACTIV

EU agrees on single point of access for information on finance, sustainability

On Tuesday (23 May), representatives of the European Parliament and of EU member states have agreed to establish a single point of access, where individuals and companies can digitally and freely access financial and sustainability-related information about European companies.