The 2021 Stability and Convergence Programmes attest to the unprecedented fiscalresponse to the COVID-19 pandemic in the EU. Facilitated by the swift activation of the general escape clause of the Stability and Growth Pact, the introduction of new EU instruments, and favourable financing conditions, Member States responded with a powerful mix of discretionary fiscal support, the full operation of automatic stabilisers and ample liquidity support. As a result, fiscal policy mitigated a fall in economic activity in 2020, though at the cost of large increases in government deficit and debt ratios. The EU headline deficit increased to about 7% of GDP in 2020 from 0.5% in 2019, while the aggregate debt ratio jumped to 92% of GDP in 2020 from 79% a year earlier.

Fiscal policy at large – including automatic stabilisers – will support a strong and sustainable recovery in 2021 and 2022. As highlighted by the Commission’s Communication of 2 June 2021, the job of supporting European economies is not yet done.(1) Complemented by a highly accommodative monetary policy stance, fiscal policy is expected to remain supportive in 2021 and 2022, thus assisting European businesses, workers and citizens as they get back on their feet. However, the nature of the fiscal support can be expected to change. As the health situation improves, Member States can scale back their emergency aid and focus on supporting economic recovery. Public investment will play an important role during the recovery phase.

Underlying fiscal positions are expected to vary across Member States. As in the past, changes in fiscal positions are analysed through the lenses of the expenditure benchmark, with specific adjustments to address the current challenges. In most Member States, the growth of nationally-financed current expenditure (net of new revenue measures) in 2021 and 2022 is projected to exceed the rate of mediumterm potential growth, pointing to a fiscal relaxation and a positive contribution to the overall fiscal stance. A fiscal relaxation of more than 0.5% of GDP in both years is expected in a couple of Member States. By contrast, about a quarter of Member States expect some tightening in line with improving economic situation. To maximise support to the recovery without creating a permanent burden on public finances, the growth of current expenditure (net of new revenue measures) should be kept under control, and be limited in Member States with high debt.

The fiscal stance for the euro area as a whole is projected to remain supportive in 2021 and 2022.

Including the fiscal impulse provided at the EU level through the Recovery and Resilience Facility (RRF) and setting aside the phasing out of temporary emergency measures, fiscal policies will provide additional support to aggregate demand in the euro area of around 1¾% of GDP in 2021 and slightly more than ¼% of GDP in 2022. In 2022, this is partly due to increases in nationally-financed current expenditure, which are expected to continue to exceed the rate of medium-term potential growth. Monetary policy is expected to work hand-in-hand with fiscal policy as the recovery gains traction.

The fiscal stance, stemming from national budgets and the EU budget, is expected to remain supportive in almost all Member States in 2021 and 2022 on average. The RRF will provide largescale financial support to Member States of up to €312.5 billion in grants and €360 billion in loans in the period to 2026. RRF grants will fund high-quality investment projects and enable productivity-enhancing reforms, without giving rise to higher national deficit and debt ratios. These grants and other sources of EU financing will boost public investment in Member States by an average of about 0.5% of GDP per year in 2021 and 2022, thus helping Member States to maintain supportive fiscal stances. Differences between Member States will depend on the allocation of RRF grants relative to GDP and the degree of absorption of those grants.