EU leaders agree the economic outlook is bleak, but split over the remedies

EuroActiv Politico News

European Union leaders meeting in Brussels on Friday agreed on one big thing: a dire diagnosis of red-hot inflation and recessionary symptoms afflicting the bloc’s economy.

They disagreed on the right treatment, whether on government handouts, joint borrowing or energy price caps. 

Those divisions leaves open the question of whether the EU can maintain unity in the face of growing economic pain, especially as Russia’s invasion of Ukraine turns into a war of attrition that’s unlikely to find a quick solution.

“Inflation is a major concern for all of us. Russia’s war of aggression is pushing up the price of energy, food and commodities and all of this has a direct impact on our citizens and businesses,” European Council President Charles Michel told reporters at the end of the meeting. “We are united and we agreed to closely coordinate our economic policy responses.”

Inflation hit a new record at 8.1 percent in May; manufacturing has contracted for the first time in two years; and business confidence has dropped to new lows, adding to fears that a recession may be looming. Against this gloomy backdrop, leaders were meant to share and coordinate their recipes for lessening economic pains as they met on the second day of their June summit.

“We will, I’m absolutely confident, maintain a political consensus on what is the appropriate fiscal policy for the euro area,” said Eurogroup chief and Irish Finance Minister Pascal Donohoe upon entering the meeting.

But that unity was in short supply on Friday.

For countries where inflation is biting more, like the Baltics, the priority is to keep businesses from going bankrupt and citizens from taking to the streets.

“Central banks are predicting there will be a slowdown, [and] this is a concern,” said Prime Minister Arturs Krišjānis Kariņš of Latvia, where inflation in May was in the high double digits. “But the primary concern is that citizens, especially citizens with less means …[get help] with targeted assistance to get through the next winter.”

Meanwhile, Northern Europeans argued that the handouts and tax cuts that treasuries everywhere are generously disbursing aren’t helping but rather adding fuel to the fire.

“[What] seems like an easy solution is not really a solution, just to put more money in the pockets of European citizens,” said Swedish Prime Minister Magdalena Andersson upon entering the meeting. “That won’t solve the problem, that would only increase inflation.”

Finnish Prime Minister Sanna Marin questioned whether tax cuts would help: “We’re putting a big dent in government coffers and we’re still not necessarily in a position to relieve the situation,” she told reporters after the summit.

Southern countries, however, argued that more joint borrowing would be needed to cushion rising energy costs.

“A common fiscal capacity is needed that makes the markets understand, ‘Look, we are all in this together,’” Italy’s Prime Minister Mario Draghi told reporters after the summit, adding it could take the form of loans and not grants. But this idea is opposed by others, including Germany.

To contain the spectacular rise in energy prices, which is helping drive headline inflation, Italy’s Draghi and Greek Prime Minister Kyriakos Mitsotakis renewed their call for capping the price of Russian gas. This move would reduce Moscow’s foreign revenues, they argued, and Russia wouldn’t be able to redirect supply as easily as with oil.

But governments from Berlin to the Hague remained unconvinced. “The major objection … is the fear that Russia in response will cut supplies even more,” Draghi told reporters after the meeting.

See you in the fall

The conundrum of high energy prices dominated Friday’s discussion, but there were no obvious, clear-cut solutions. On Draghi’s urging, there had been some talk of calling an extraordinary summit in July to return to the economic challenges, but others quickly put a kibosh on the idea. 

And with leaders of the EU’s biggest economies — Germany, France and Italy — headed from Brussels to a G7 leaders’ summit this weekend in Bavaria, there seemed little point in preempting the discussions about the global economy about to take place with the United States, Japan and Canada. 

In the end, EU leaders wrapped up their summit by committing to “ensure closer energy coordination” between themselves and called on the Commission to present a report in September on ways to keep energy prices in check, rehashing a call to explore the feasibility of price caps.

Draghi called it a “satisfactory result,” and said that the issue will be discussed again at a summit in October. “Things are moving,” he said.

Commission President Ursula von der Leyen also committed to presenting in July common contingency plans on what to do if gas supply from Russia grinds to a halt.

Another pressing topic where divisions emerged was the European Central Bank’s chosen path for tightening monetary policy, starting in July.

ECB President Christine Lagarde fielded questions from some Northern European leaders on the so-called “backstop,” which the central bank is preparing as a tool to prevent financing conditions of high-debt eurozone countries from rising too rapidly or too much, according to officials briefed on the talks, while Southerners defended her course of action.

“We will preserve the orderly transmission of our monetary policy throughout the euro area,” she told leaders, according to one official. “Our commitment to our mandate should not be doubted.”

Meanwhile, following last week’s belly-flop on Donohoe’s plan to complete the banking union, leaders issued a separate set of conclusions that called on the Commission to present proposals on strengthening bank crisis management and rules on deposit guarantee schemes. They also agreed to return to completing the banking union at a later, unspecified date.

And there was one bright spot of agreement: Leaders gave their nod to Croatia joining the eurozone in 2023, a decision to be formalized at a meeting of finance ministers next month.

David Herszenhorn, Giorgio Leali and Lili Bayer contributed reporting.

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