MNI: EU Fiscal Consolidation Getting Harder - Commission

EU governments will find further fiscal consolidation efforts even more difficult to achieve as a result of the recent fall in inflation and higher refinancing rates on their debt, the European Commission will say on Tuesday in its European Semester package.

High government spending during the pandemic has left debt above pre-pandemic levels despite the tailwind from the high inflation and higher nominal growth of recent years, the Commission will say.  (See MNI: EC Sees Only 'Moderate' Defence GDP Impact)

"These denominator effects will weaken in the future, making deleveraging more difficult to achieve."

The Commission will note that government debt is still being rolled over at higher rates, pushing debt interest payments up despite recent falls in short-term European Central Bank policy rates.   

"These higher interest payments come on top of a need to increase certain crucial categories of spending, such as on defence or ageing-related expenditure, and to finance public investment, creating strong challenges for fiscal policies in many Member States."

The Commission will say that the euro area fiscal stance is expected to be “broadly neutral” this year and in 2026 after being “slightly restrictive” in 2024.