There will be discussions about the budget deficit ceiling in the EU due to the war - Dombrovskis

  • 2022-04-28
  • LETA/TBT Staff

RIGA - Due to the war in Ukraine, European Union member states have to face higher budget deficits this year, so there will be discussions in the coming month about the deficit ceiling, which was previously lifted due to the pandemic but was scheduled to be resumed next year, European Commission Executive Vice President and Trade Commissioner Valdis Dombrovskis (New Unity) told LETA.

"At present, the so-called general exemption clause is still in force, which means that no quantitative deficit ceilings have been set for Member States this year, which should not be exceeded. Throughout this year, we will also assess the overall economic situation in the European Union, including the impact of the war in Ukraine on the European economy. It is clear that countries need to be clear when starting work on next year's budget about what the overall fiscal framework is, whether we are returning to fiscal rules and, if so, in what format. Discussions will take place in the coming month and a decision is expected at the end of May," Dombrovskis said.

He acknowledged that this year the member states of the European Union have to face growing budget deficits, both due to the fact that the war in Ukraine has slowed economic growth and, consequently, lower tax revenues, and additional budget expenditures to provide assistance and financing to Ukraine, which is also needed to help Ukrainian refugees in the European Union, as well as economic support programs.

"All this requires additional funds. In addition, if this warfare continues, it may be carried over to the next year. Another factor is the increase in energy and food prices due to the warfare. This factor will also have to be taken into account," Dombrovskis emphasized.

Asked about support for those countries bordering Russia, Belarus and Ukraine, including the Baltic states, which are more affected by the war, Dombrovskis said that the implementation of the Economic Recovery and Sustainability Mechanism plan is in its infancy, providing significant additional support to economic recovery and green transformation, and this is also currently relevant in the context of the abandonment of Russian fossil fuels.

"These funds can be used for these purposes. In addition, if we are talking about the Economic Recovery and Sustainability Mechanism, there are still unused loans in the amount of more than EUR 200 billion that Member States can request. Also, for example, Latvia has not requested such a loan so far," the European Commission vice president stressed.

He also pointed out the need to think about the resources that are currently needed to support Ukraine and then to rebuild it after the war. A special meeting was also held during the General Assembly of the World Bank and the International Monetary Fund.

"The assessment is that as long as the active war in Ukraine continues, financial support of about five billion euros is needed every month. Of course, this is a very large amount of money and it was discussed how such funds can be mobilized in the coming months. At the same time, the financing of Ukraine's long-term economic recovery is being discussed. There are several initiatives. For example, the World Bank is setting up its own trust fund. The European Union has also agreed to set up a Solidarity Trust Fund for the reconstruction of Ukraine. Therefore, the question is how international assistance is coordinated so that these initiatives mesh with each other," said Dombrovskis.

He also noted that the amount of funding that will be needed to rebuild Ukraine is significant. "At the moment, of course, no one can give an exact figure, as the damage continues, but expert estimates amount to up to EUR 500 billion," Dombrovskis said, adding that Europe was likely to provide the greatest support for Ukraine's reconstruction.

However, he pointed out that there were currently no plans to take money from the European Union's existing budget programs and redistribute them elsewhere, as the budget programs available for such purposes are being used: humanitarian aid, military aid programs and funds, and macro-financial assistance programs.

"At the same time, it must be said that the budget reserves are being used at a very rapid pace. However, if we are talking about hundreds of billions of euros in aid, this cannot be the current budget of the European Union. It will obviously require additional funding, including from the member states of the European Union," admitted Dombrovskis.

He also emphasized that it is currently being assessed how Russia could pay for post-war reconstruction in Ukraine. Among other things, a working group has been set up in the European Union to freeze and seize Russian-sanctioned assets.

"Basically, this applies to the assets of the individual, more simply the oligarchs, and companies. It is not that simple, as these assets can be confiscated if they are proven to be involved in criminal activities under the law of the Member State where they are located. However, work is under way and the idea is to channel these funds, including to support internally displaced persons. We are also currently assessing the assets of the Central Bank of Russia. On the one hand, these assets can be said to have almost universal immunity, but on the other hand, there is an "aggressor pays" principle in international law and the aggressor must pay reparations for the damage he has caused. Therefore, this situation is being assessed and, where there will be an opportunity to divert assets to support or rebuild Ukraine, this will be done," the vice president of the European Commission promised.