The European Commission continues to warn of the serious risk of a “stagflationary” shock triggered by the crisis in the Middle East, citing a slowdown in European economic growth of up to 0.6 percentage points and a renewed rise in inflation.
In an interview with Kathimerini, Economy Commissioner Valdis Dombrovskis clarified, however, that there is no question of activating the escape clause to allow additional expenditure, as no recession is occurring. He also urged all European Union member-states to adopt limited and targeted support measures to address the current crisis, noting that fiscal space remains constrained.
Dombrovskis, who is visiting Athens on Friday, is scheduled to meet with Prime Minister Kyriakos Mitsotakis, where he is expected to officially announce the disbursement to Greece of €1.18 billion from the Recovery and Resilience Facility (RRF), but rules out an extension of the EU’s funding tool.
The Latvian official appears optimistic about the course of the Greek economy, noting that growth is projected at 2.1-2.2% for this year and next, levels above the European average, and real and disposable household incomes are seen increasing. However, despite the strong primary surplus that the European Commission also expects Greece to achieve in 2025, Dombrovskis warns about the high level of public debt, which requires careful management, particularly given high interest rates.
Commissioner, what is the European Commission’s current assessment of the impact of the Mideast crisis on the European economy, and through which channels is this shock mainly being transmitted?
At this stage, the European Commission has done some economic modeling on the possible impact. Obviously, it depends on the duration of the conflict and the intensity of the oil and gas price shock. Depending on how long-lasting these disruptions are, our estimates are for the economy to slow down by some 0.2 to 0.6 percentage points, while at the same time having elevated inflation that may exceed one percentage point. All in all, what we see is that we are facing a “stagflationary” shock to the economy. To put this into perspective, before the war, our economic forecast was for economic growth in the EU of around 1.5% both this year and next. We will be publishing some spring economic forecasts on May 21 with a more detailed assessment, also country-by-country. We will also, by then, have more clarity on how the conflict is developing, whether we see some de-escalation and a peace process.
You have been warning of a “stagflationary” shock since mid-March. Based on the latest forecasts, which will be presented in May, how do you see the EU coming out of this crisis?
The question is through what channels the economy is affected. First and foremost, it’s through the energy prices – we are primarily dealing with an energy supply shock. But it may also spread to other value chains, for example, fertilizers, which can affect food prices. So, it’s clear that the longer the conflict lasts, the more the impact will spread to the broader economy.
In terms of our policy response, we are emphasizing the area of energy, where we are already acting, including by coordinating the release of oil reserves. We are also preparing an energy package, mandating, for example, that electricity is not taxed higher than fossil fuels. The emphasis is on the electrification of the economy and the continued rollout of renewables, while having a fresh look at nuclear as a low-carbon energy source. If we reduce our dependency on fossil fuel imports, we can isolate ourselves from the volatility of fossil fuel prices. We are also looking at some targeted adjustments to how the energy market functions in the EU and the emission trading system.
In terms of fiscal policy, our advice to member-states is that measures to support the economy must be temporary and targeted. We have to learn from the previous energy crisis, following Russia’s invasion of Ukraine in 2022, where the measures member-states put in place were much less temporary and much less targeted than they should have been, and were fiscally very costly. This time, we have more limited fiscal space because we have emerged with higher deficit and debt levels from both the Covid pandemic and the previous energy crisis.
How do you assess the measures already taken by member-states? And why do you rule out, at this stage, more radical measures like the activation of the general escape clause? What conditions would need to be met for this position to change?
The general escape clause is there to respond to the severe economic downturn in the EU or the euro area as a whole. We are currently not in a severe economic downturn, but in a slowdown, so the conditions are not met. Furthermore, there are automatic stabilizers built into the economic governance framework that already allow for fiscal flexibility before member-states even take discretionary measures. For example, if there is a revenue shortfall because of the economic slowdown, it does not have to be compensated for; likewise, if there are increases in unemployment benefits because of the slowdown, this cyclical component does not need to be offset.
As for the measures member-states are already taking, I would say the picture is a bit mixed. There are both targeted and untargeted measures. So far, the fiscal impact of measures is quite contained in the case of Greece, per our current assessments. Of course, the situation may change. Most of the measures are targeted, but not all of them. One measure we consider not targeted is the diesel subsidy. Overall, the fiscal impact is currently estimated at 0.1% of GDP, so it’s contained. But the situation in member-states continues to evolve as regards the measures which are being taken.
How does the Commission assess Greece’s overall fiscal position? And how much room does it have to introduce additional support measures for the current crisis without jeopardizing fiscal stability?
All in all, Greece has a good track record in recent years as regards its fiscal position, with substantial surpluses. I understand it also expects quite a sizable surplus again in 2025, so that’s certainly a positive development and gives it a certain margin of maneuver. But Greece still has the highest debt-to-GDP ratio in any of the EU member-states and, in the current interest rate environment, it needs to be careful.
Government officials also say that they expect some sort of flexibility on behalf of the Commission over the support measures. Since you’re ruling out the activation of the general escape clause, what kind of flexibility could be there?
Apart from the automatic stabilizers, we will have the opportunity to discuss and assess specific measures or flexibility with the representatives of the government during my visit to Athens.
What is the purpose of your visit to Athens, and which issues will be at the focus of your talks with the government?
We will discuss both macroeconomic and fiscal issues, as well as the implementation of the RRF. We also expect to make an RRF payment for Greece during my visit of €1.18 billion. I will also meet with the central bank governor and participate in the Delphi Economic Forum.
The RRF is approaching its final deadline in August. How do you assess Greece’s performance so far in terms of implementation and absorption of funds? And do you see any realistic scenario for an extension of the instrument? There is a discussion in some member-states about that.
In terms of implementation, it’s worth noting that Greece actually has the largest recovery and resilience plan in terms of its share of GDP, at almost 16%. So far, Greece has received €23.45 billion in both grants and loans, and that’s 65% of the total RRF envelope. So that’s somewhat better, I would say, than the EU average. And, as I said earlier, we expect another payment for Greece.
Of course, in the remaining months, one needs to really focus on implementation, because following the payment this week, there are still two payments, including the last, which is by far the biggest. So now really is a time to focus on the delivery of results and on preparing for the endgame. We have been working with member-states, including Greece, to revise their recovery and resilience plans, to simplify and streamline them, and also to realistically assess investment projects and to move the projects that cannot be implemented out of the RRF. Also, where necessary, to stagger investment projects. If, for example, it’s a large investment project which cannot be finished by end-August, it’s possible to agree that it be finished to a certain stage of maturity, and that the remaining part is then financed from cohesion or national funding. From that point of view, Greece submitted its revised plan in November last year, and it was approved in December. So now we can really focus on the implementation of this revised plan.
In terms of extensions, it’s very difficult to expect any extensions because the deadlines are clearly written in the RFF regulations. We’ve had this discussion for several years already on whether or not to change those deadlines, but there was no broad consensus, especially for payments that would require amendments to the multiannual financial framework, which requires unanimity – which clearly was not there. So we must work with existing deadlines in mind, meaning all milestones and targets must be met by end-August, all payment requests must be submitted by end-September and all payments done by end-December.
Despite the Commission’s overall positive assessment of Greece’s macroeconomic performance, the people of this country have not seen a significant improvement in their disposable income. How do you explain this?
Well, first of all, we see that the Greek economy is actually doing quite well. We will be updating the forecast for the growth rate next month, but if you look at our existing economic forecasts, it’s for some 2.1-2.2% this year and next, which is well above EU average growth rates. And we also see the increase in real incomes. So all in all, we believe that the Greek economy is improving, and also that the household disposable income is growing.