Brussels EU Commission Vice President Valdis Dombrovskis has called for a “more cautious spending policy” in view of rising interest rates. “The period of cheap money is coming to an end,” said the Latvian in an interview with the Handelsblatt and other European media. The task now is to find the “right balance”.
“On the one hand, we should maintain investments – also with the help of the Corona reconstruction fund. On the other hand, we must limit spending growth,” he demanded. Dombrovskis rejects new economic stimulus programs despite the slowdown in economic momentum: “We are primarily dealing with a supply shock, with bottlenecks and delivery disruptions. There is no use in stimulating demand through fiscal policy.”
Some experts warn that a new euro crisis is looming, but Dombrovskis gives the all-clear. “We learned a lot after the global financial crisis of 2008,” he said. “At that time, the problems spread from the banking sector to the entire economy.” Today, the financial institutions are “significantly more resilient, we have built up capital and liquidity buffers”. Dombrovskis, on the other hand, is concerned about the high inflation: “We are now observing that the high energy prices are also affecting other areas of the economy.”
Dombrovskis sharply criticized the Russian decision to throttle gas supplies to Europe: “Russia’s manipulation of the gas market underscores why we need to replace Russian energy imports as quickly as possible.” But even in the event of a complete supply freeze, the EU could avoid a severe economic crisis . “If we manage to diversify further and fill up the gas storage facilities, there doesn’t have to be a recession.”
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Read the whole interview here:
Mr. Dombrovskis, interest rates in Europe are rising – and with them the debt burden that southern European countries in particular are struggling with. Are we facing a new euro crisis?
We learned a lot after the global financial crisis of 2008. At that time, the problems spread from the banking sector to the entire economy. Today, the financial institutions are much more resilient, we have built up capital and liquidity buffers that have already proven their worth during the pandemic. The crisis hit us this time in much better shape.
Nevertheless, the nervousness on the markets is growing.
We therefore have to adapt our spending policy to the changed conditions. The European Finance Council just presented its current report to us today. The recommendation is to switch to a moderate austerity policy in the coming year. This is in line with our own advice to Member States to adopt more prudent spending policies. The period of easy money is coming to an end. The European Central Bank (ECB) is withdrawing its support measures.
With good reason: at 8.1 percent, inflation has reached its highest level in the history of the monetary union.
Inflation is a bigger problem than previously thought. The main driver is expensive energy, but we are now seeing that the high energy prices are also having an impact on other areas of the economy.
Is this the right time for savings? Many people need help.
We have to find the right balance. We must continue to support low-income households and shield them from high energy costs. Aid for refugees from Ukraine should also continue. At the same time, however, we must review the composition of state finances. On the one hand, we should maintain investments – also with the help of the Corona reconstruction fund. On the other hand, we need to limit spending growth.
What does that mean specifically?
The time for broad-based economic programs is over. We are primarily dealing with a supply shock, with bottlenecks and delivery disruptions. There is no use in stimulating demand through fiscal policy.
How do you assess the risks in highly indebted countries like Italy, France and Greece?
After the corona crisis, we managed to quickly find our way back to economic growth – also because we acted in the spirit of European solidarity. The recovery fund is now available and will help the heavily indebted countries in particular.
Against the background of the tense economic situation: Are our sanctions hurting us more than Russia?
Let’s look at the facts. The Russian economy will shrink by 8.5 percent this year, according to calculations by the International Monetary Fund (IMF). This means that Russia is facing a severe recession because of our sanctions. The European economy, on the other hand, continues to grow – and even grew more strongly than expected in the first quarter. This shows that we designed the sanctions in such a way that they hit Russia harder than we do.
But Moscow is hitting back and cutting gas supplies to Europe.
Russia’s manipulation of the gas market underscores why we need to replace Russian energy imports as soon as possible. We must overcome our dependency. And that’s exactly what we do.
However, this is hardly possible in the short term. In Germany there is growing concern that the flow of gas from Russia will dry up completely.
I would like to remind you that gas is not subject to EU sanctions.
That’s right, only: Russia is throttling gas supplies of its own accord.
Which underscores the argument that we can no longer rely on a supplier that uses fossil fuels as an instrument of power and manipulation. That’s why we’re diversifying now. We work with Norway, the second largest gas supplier in the EU. The US has pledged to supply an additional 15 billion cubic meters of gas this year and up to 50 billion cubic meters per year thereafter. These are significant amounts, even considering that Russia has so far supplied 155 billion cubic meters per year.
Is Europe at risk of a recession if there is an abrupt halt to deliveries?
Back in the winter, when Russia began aggression against Ukraine, we analyzed what the impact of a sudden stop in deliveries would be. Even then, we came to the conclusion that such a situation could be controlled, albeit with difficulty. Now the winter is behind us. We have tapped some new sources, the gas storages are filling up. Our goal is to reach a filling level of 80 percent in November. So we’re in a better position than last year, when Russia deliberately withheld supplies and didn’t fill the stores.
How badly would the economy collapse in the event of a Russian delivery stop?
The uncertainty about this is enormous, so it makes little sense to name a number.
Do you expect the economy to shrink?
It depends on. If we manage to diversify further and fill up the gas storage facilities, there doesn’t have to be a recession.
To replace Russian gas, coal-fired power plants in Germany and other EU countries are being ramped up again. Can Europe keep its climate protection promises like this?
In the short term, we are dependent on emergency measures. Going back to coal is certainly preferable to a lack of supply. At the same time, however, we must accelerate the expansion of renewable energies in order to replace fossil energies.
That costs a lot of money. Does the EU also have to think about new joint debts?
First of all, the Corona reconstruction fund is still available to us. 220 billion euros have not yet been spent. In addition, we propose withdrawing EUR 20 billion from emissions trading. That is the first line of defense and what is currently on the table.
At this week’s EU summit, in addition to the economic situation, the enlargement of the Union will be discussed. Ukraine is likely to be officially declared a candidate country. What do you expect from this?
It is an important sign for Ukraine and Moldova. It gives hope to Ukrainians defending themselves against Russian aggression. And it is also a geopolitical signal. We make it clear that these countries can determine their own destiny and are not stuck in Russia’s sphere of influence. Before the accession negotiations can begin, however, the candidates still have to implement important reforms in order to bring the economy and legislation in line with European standards. That can take a long time. Some countries have done it in five years, others take much longer.
One last topic: Lithuania has tightened border controls with the Russian enclave of Kaliningrad. Russia speaks of a blockade and threatens a tough reaction. Are we entering a dangerous new phase of escalation?
Lithuania is implementing the sanctions that the EU unanimously passed. There can be no question of a blockade. The supply of essential goods remains unlimited. But there are goods that are on the sanctions list, such as steel and building materials. The transition period for these measures has now ended, so the Lithuanian authorities need to take action now.
More: War, inflation, supply bottlenecks – the economic situation is tense, the outlook even gloomier