Members' Research Service By / February 2, 2022

Economic and Budgetary Outlook for the European Union 2022

According to preliminary figures for 2021, gross domestic product (GDP) rebounded in all Member States, exceeding previous more modest expectations.

© European Union, 2022, EPRS

Written by Alessandro D’Alfonso, Angelos Delivorias, Martin Höflmayer, Karoline Kowald, Marianna Pari and Magdalena Sapała, with Nela Foukalova.

According to preliminary figures for 2021, gross domestic product (GDP) rebounded significantly in all EU Member States (by 5 per cent), and even exceeded last year’s more modest expectations. The European Commission expects euro-area and EU GDP growth to continue in 2022, but becoming more muted. This forecast depends on several variables, however, including whether the pandemic finally subsides, supply bottlenecks and/or material shortages, and inflation, which – against expectations – could remain high or increase further. Other risks identified could stem from the international environment (in particular China and Russia) or climate change (with extreme weather events likely to occur more frequently).

When it comes to employment, the national and EU measures, such as the temporary ‘Support to Mitigate Unemployment Risks in an Emergency’ (SURE) instrument, put in place early in the Covid‑19 crisis helped to dampen its effects to a greater degree than expected in 2021. Moreover, unemployment is projected to decline further in the coming months. As was the case last year, this rebound in GDP and the diminishing unemployment figures are common to most major economies, although the rates vary slightly. In the course of 2022, the unemployment rate will depend on the timing and pace of the withdrawal of policy support schemes and on whether the economic recovery continues. Taking these factors into consideration, unemployment is expected to fall in the coming years.

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As a result of the various measures put in place, general government deficits grew significantly in 2021. While these deficits are thought to have peaked, the debt-to-GDP ratio is expected to remain high, with levels in 14 Member States still higher than the Maastricht Treaty limit of 60 % in 2023. Therefore, it is expected that deficit and debt will be at the centre of discussions in the immediate future, as application of the general escape clause comes to an end, and also in the context of the review of the EU economic governance framework.

Similarly, in 2021, the European Central Bank (ECB) significantly expanded its holdings under the Asset Purchase Programmes and the Pandemic Emergency Purchase Programme. Following its Governing Council meeting in December 2021, the ECB is expected to ease off on these purchases, but the future pathway is not yet clear, as it depends on elements such as complete recovery from the crisis and the course of inflation. Indeed, following several years of low inflation, the strong resumption of economic activity in the EU has been accompanied by a swift pick-up in prices, with average inflation for the euro area in October 2021 at 4.1 % and strong variations between Member States. Inflation – as estimated in November 2021 – was expected to reach 2.4 % in 2021 in the euro area and 2.6 % in the EU as a whole, with similar trends in other major economies. This has led to a discussion regarding the nature of the current inflationary pressures and whether these transitory price pressures will become more persistent.

The pandemic has had a major impact on the design of the medium-term structure for EU finances, resulting in the adoption of an unprecedented budgetary package that combines the €1 210.9 billion multiannual financial framework (MFF) for the years 2021 to 2027 with the €806.9 billion Next Generation EU (NGEU) instrument. This new financial architecture has brought new momentum to the EU budget, assigning it a major role in the Union’s strategy to relaunch the economy. In addition, on the revenue side, the European Commission has proposed a package of new own resources that could generate an average total of up to €17 billion annually (in 2018 prices) for the EU budget over the years 2026 to 2030. This sum would help to repay the funds raised by the EU to finance the grant component of Next Generation EU.

The 2022 budget is designed to support the EU’s recovery through investments, in addition to its other objectives. Although it is limited to €169.5 billion in commitments (1.14 % of EU-27 gross national income – GNI), it represents an important stimulus for public investment in several Member States, all the more so when considered in conjunction with NGEU, which is expected to provide an additional €143.5 billion. The EU budget includes a €1.6 billion reinforcement of flagship EU priorities, as negotiated and secured by the European Parliament. In this second year of both the 2021-2027 MFF and NGEU, the implementation of the new generation of EU actions and programmes is expected to gain momentum, while the programmes from the previous financing period, 2014 to 2020, approach closure. The green transition is an integral part of the recovery. It is estimated that, in 2022, the EU budget and NGEU will jointly contribute €165.3 billion to this objective. Other priorities supported by EU resources include cohesion and agriculture, the digital transformation, security and defence, migration and border management, and the EU’s role in the world.

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The focus of this year’s edition of the Economic and Budgetary Outlook is recovery. Given the importance of the subject, two chapters are devoted to it (Chapters 6 and 7). The first deals with economic aspects of the recovery, while the second focuses on the Next Generation EU instrument and the Recovery and Resilience Facility.

The response provided by Member States and the EU to the pandemic, as well as the economic support provided to cushion the effects of lay-offs, preserve incomes and protect businesses, are the subject of this year’s ‘economic focus’. The fiscal and monetary reaction has been unprecedented, in terms of both approaches and volumes. It is described in detail, from the EU’s recovery package (MFF and NGEU) of €2 018 billion, to the ECB’s new Pandemic Emergency Purchase Programme of €1 850 billion. This leads on to a topical debate on the fiscal rules, on whether (and to what extent) debt-financed government spending should be kept in check, and on some of the proposals available. Furthermore, as governments shift from the ‘rescue’ to the ‘recovery’ phase, some possible ways to harness this phase, to support the transition towards sustainable economies, are explored.

The Covid-19 pandemic has caused significant labour market dislocation, with effects varying between countries, sectors and social groups, exacerbating the pre-existing inequalities and accelerating the transition towards automation and digitalisation. The EU’s immediate ‘rescue’ policy response included job retention schemes, while – as economies have begun to recover – Member States have started to move towards long-term recovery measures. The recovery is expected to be unequal across sectors, and reallocation and other active labour market policies will play an important role. The Commission’s recommendation on ‘effective, active support to employment’ (EASE) offers a strategy for a gradual transition towards a job-rich recovery, supporting job creation and job-to-job transition, for instance to the green and digital sectors.

Lastly, the EU’s recovery response steers the transition towards climate neutrality, in line with the European Green Deal. To this end, an unprecedented volume of resources has been earmarked: 30 % of the EU’s long-term budget and NGEU taken together has been allocated to addressing climate change and biodiversity protection. Moreover, all investments must uphold the ‘do no significant harm’ principle. The EU’s green recovery areas are labelled ‘Power up’ (clean technologies and renewables), ‘Renovate’ (improvement of energy efficiency of public and private buildings) and ‘Recharge and refuel’ (sustainable, accessible and smart transport, charging and refuelling stations, and extension of public transport).

Overall, Next Generation EU – the recovery instrument financed through resources borrowed on the markets by the European Commission on behalf of the Union – represents a major innovation in EU finances. Complementing ECB action and national stimulus packages, with a coordinated common fiscal response, NGEU significantly reinforces the resources channelled through EU budgetary instruments up until 2026. Its main expenditure tool, the Recovery and Resilience Facility (RRF), is implemented through national plans that comprise a coherent package of reforms and investments aimed at making the EU economy more sustainable, innovative and inclusive. To this end, the RRF focuses its action on six policy areas of European relevance identified as vital for strengthening the EU’s resilience, including the green transition (at least 37 % of each national plan) and the digital transformation (at least 20 %). The grant component of NGEU (up to €338 billion) is projected to be used entirely, whereas Member States have so far requested less than half of the available loan component (€166 billion out of €385.8 billion). While the RRF is already contributing to the EU recovery, 2022 is the first year of its full deployment, putting the focus on the importance of RRF implementation and monitoring, as underlined by the European Parliament. Lessons learnt from the RRF are likely to feed into the ongoing debate on the review of the EU’s economic governance framework.

Read the complete study on ‘Economic and Budgetary Outlook for the European Union 2022‘ in the Think Tank pages of the European Parliament.

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