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Pandemic legacy set to hang heavily over EU budget numbers


Good morning and welcome to Europe Express.

The European Commission’s latest economic forecast paints a somewhat better picture of how public finances will fare after the pandemic hangover. We’ll take a look at the major caveats to that outlook, including the spectre of pandemic restrictions returning.

EU Brexit commissioner Maros Sefcovic meets his British counterpart in London today, amid continued verbal threats. (Our sister newsletter Britain after Brexit has the latest.)

As we flagged in yesterday’s Europe Express, trade ministers did express their exasperation at the French for stalling EU’s trade deals, particularly the one with Chile. We’ll discuss what they argued about and the way forward.

And as Bulgarian voters are heading to the polls for a third time this year on Sunday, we’ll explore what chances there are for Sofia to have a functioning government any time soon.

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Narrowing deficits

One of the consequences of punchy growth predictions from the European Commission yesterday is a somewhat quicker improvement in public finances than Brussels was expecting, writes Sam Fleming in Brussels.

The overall budget deficit in the EU is now forecast to narrow to (a still-lofty) 6.6 per cent of GDP this year compared with 2020, rather than widening as was previously forecast. The budget gap will go on to roughly halve next year to about 3.6 per cent of GDP before declining below 3 per cent in 2023.

The improving numbers are driven by a confluence of factors, including most obviously the speed of the EU’s economic recovery. Brussels now predicts 5 per cent growth in the EU for 2021 and 4.3 per cent growth in 2022 (a hearty upgrade from its outlook this time last year, when it was pencilling in growth of 4.1 per cent and 3 per cent in 2021 and 22 respectively).

Expanding activity, with more people in work and consumer spending unleashed by the end of lockdowns, will drive healthier government revenues. At the same time, emergency support measures are set to be curtailed early next year, easing demands on finance ministries.

Member states are also tucking into the €800bn NextGenerationEU recovery fund, a large chunk of which is comprised of grants from Brussels. This external assistance will help drive an improvement in the investment-to-GDP ratio from 3 per cent of GDP in 2019 to 3.5 per cent in 2023, the commission reckons.

So far so good. But there is inevitably a sting in the tail. Firstly, the commission’s outlook contains a number of “downside” risks which could cast a shadow over the rosy growth predictions. They include the ever-present danger of a resurgence of Covid-19, which might necessitate tighter pandemic rules and weaker growth in a number of member states.

In addition, it will be harder to sustain rapid improvements in public finances once the rebound loses its ruddy early glow.

Indeed, the commission is anxious for member states not to seek to pare back fiscal support too aggressively, and for targeted measures to remain in place.

No fewer than 10 countries are on track to carry budget deficits exceeding the EU’s 3 per cent threshold at the end of its forecast horizon. And getting overall public debt mountains down will represent a vertiginous longer-term challenge.

Overall debt-to-GDP ratios subside only incrementally by 2023 under the latest forecasts. And by the end of 2023, the debt ratio is predicted to remain above 100 per cent of GDP in six member states (Belgium, Greece, Spain, France, Italy, and Portugal), compared with three member states on the eve of the crisis.

A slightly better picture for public finances in the next year or two is a welcome side-effect of the EU’s stronger growth performance. But that doesn’t mean the onerous legacy of the Covid-19 crisis on public finances has suddenly gone away.

Chart du jour: Deficits galore

Bar chart of National budget deficit forecast, in per cent of gross domestic product showing Budget balance

In the euro area, only Luxembourg is projected to reach a marginal budget surplus in 2022, with most countries deep in the red after deploying public funds to help struggling households and whole economic sectors in the pandemic. Outside the eurozone, Denmark and Sweden are also set to go black next year, according to the commission’s autumn forecast. (More here)

La résistance against Chile

EU trade ministers showed little understanding yesterday for France’s decision to block EU trade deals that could be finalised within weeks, notably the one with Chile, write Valentina Pop and Andy Bounds in Brussels.

“All countries rallied against France on Chile,” said a senior diplomat familiar with the talks. One factor on ministers’ minds is an upcoming election in Chile, with the current conservative government hoping to capitalise on the trade deal. “If they are voted out, then the whole effort was for nothing,” the diplomat said. Elections are on November 21.

Several countries, including Germany, will ask commission chief Ursula von der Leyen to broach the trade topic with Emmanuel Macron, president of France, in the hope that the deal can still be signed.

It allows Chile to send 18,000 tonnes of chicken tariff-free to the EU annually, less than 0.2 per cent of the bloc’s annual consumption.

Macron fears a farmer backlash in elections in April.

Franck Riester, the French junior minister for trade, came out fighting, with a statement saying he had “defended French positions”.

“Trade agreements should not destabilise our sensitive agricultural sectors,” Riester said. “We are very vigilant in the current negotiations, especially at a time when our farmers are faced with high market volatility in the context of the global economic recovery.”

But Slovenia’s economy minister Zdravko Pocivalsek, who chaired the meeting, said many member states were pressing the commission to simply sign the deal.

Valdis Dombrovskis, EU trade commissioner, agreed that the technical work was done but “there are political discussions ongoing”. “Any trade agreement needs approval by the member states and the European parliament,” he pointed out.

But the prospects now look cloudy for other hoped-for deals with Mexico, New Zealand, which will want to sell more lamb to the EU, and Mercosur, a trading bloc of some South American nations, which has been offered a tariff-free poultry quota of 180,000 tonnes.

On a brighter note, Dombrovskis said talks with Australia would restart early next year. Paris had blocked them after Canberra cancelled a submarine contract as part of a new defence deal with the UK and US.

He said the recent commitment by Australia to a net-zero carbon economy had helped matters.

Bulgarian election, take three

Bulgaria will attempt for a third time this year to elect a government after a drawn-out executive paralysis, with politicians under increased pressure to focus on concurrent health and energy crises, writes Marton Dunai in Budapest. As a consequence, the likelihood for a compromise is somewhat higher than in April or July.

The decade-long rule of conservative leader Boyko Borisov came to an end in the spring as he was seen as the main culprit behind endemic corruption, which has contributed to keeping the Balkan nation of 7m firmly in place as the EU’s poorest.

Borisov’s Gerb party won the April vote but failed to gather any allies to form a government — but neither could other parties, leading to a repeat vote in July.

The anti-establishment ITN party of pop star Slavi Trifonov edged out Gerb for a win in July but its opaque and unpredictable politics led to failure once again to form a majority political platform, leaving the country in the hands of caretaker governments for several more months.

Two caretaker cabinet members even struck out on their own, forming a new party called We Continue the Change, which has gained enough support to be a potentially important building block for a new government.

In the latest opinion polls, Gerb has been the clear leader again at about 24 per cent support, with the Socialist party and We Continue the Change each around 15-16 per cent, and the ITN party just below 10 per cent. Democratic Bulgaria also polled at about 10 per cent, as did the ethnic Turkish party MRF.

Analysts say it may again be difficult to reach an agreement but pressure has grown on the political elite as energy prices soar and Bulgaria racks up record Covid-19 infection and death numbers while having the lowest vaccination rates in the EU.

What to watch today

  1. EU Brexit commissioner Maros Sefcovic meets his British counterpart Lord David Frost in London

  2. EU finance ministers meet on the bloc’s 2022 budget

  3. French president Emmanuel Macron hosts an international summit on Libya

Smart reads

  • Permanent recovery fund: The Centre for European Reform is making the case for why the bloc’s post-pandemic recovery fund based on mutual debt should be a permanent EU outfit. One argument: if the bloc is serious about its climate ambitions, the current fund is nowhere near sufficient for the green transition investments needed.

  • Green gloom: Despite increased public interest in climate issues, green parties are faring poorly across all leading democracies, writes FT’s Simon Kuper. The reason may be that voters have worked out that going green will be a painful ride and that, for now, “green growth” is a fairy tale. So they elect leaders who talk green but don’t act on it.

  • Next generation east: A growing number of young diplomats in Eastern Partnership countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine) were born after the fall of the Soviet Union, are pro-European and increasingly reluctant to support Russia, but also see China as an attractive economic player, writes the European Council on Foreign Relations.

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Today’s Europe Express team: sam.fleming@ft.com, valentina.pop@ft.com, andy.bounds@ft.com, marton.dunai@ft.com. Follow us on Twitter: @Sam1Fleming, @valentinapop, @AndyBounds, @mdunai.





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