Euro zone should tighten fiscal policy in 2024 to curb inflation -EFB

By Jan Strupczewski

BRUSSELS (Reuters) – Euro zone governments should tighten fiscal policy next year more than currently planned to help the European Central Bank fight inflation and prevent interest rates rising too high, the European Fiscal Board (EFB) said in a report on Wednesday.

The EFB is an independent advisory body set up to assess fiscal policy in the 20 countries that share the euro currency and advise the executive European Commission.

The Commission expects that in 2024, euro zone governments will reduce fiscal support to the economy by 0.8% of GDP, but the EFB said the overall euro zone fiscal stance would remain supportive even with that tightening.

“Because of the favourable macroeconomic outlook, the EFB considers a restrictive fiscal impulse in the euro area appropriate in 2024,” it said in its annual report.

“Moreover, falling inflation and rising interest rates will in due time provide less relief to public finances. Barring new negative developments, an improvement in the structural primary balance beyond the 0.8% of GDP projected by the Commission would appear to be appropriate,” the report said.

The EFB said the euro zone economy would operate close to its potential in 2024 and the labour market would remain surprisingly tight.

“Therefore, 2024 could very well ex post fall into the category of ‘economic good times’,” the EFB said.

The European Central Bank has been rapidly raising interest rates since the middle of 2022 to stem high inflation and is keen for fiscal policy not to work against it.

To that end, euro zone governments are to phase out their energy price subsidies this year, withdrawing some 1.25% of GDP in fiscal support.

“A sizeable restrictive fiscal impulse would help the ECB in the pursuit of its inflation target. A fiscal policy stance that is too expansionary would imply higher interest rates with a potential knock-on effect on output,” the EFB said.

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