Bank of Spain
El contexto económico tras el inicio de la invasión de Ucrania y la respuesta de política económica

Europe's fiscal policy response to the war in Ukraine

The Governor of the Bank of Spain analyses the economic consequences of the war in Ukraine, in a context of high uncertainty depending on the severity and duration of the conflict. He also provides a range of recommendations and reflections on the implementation of economic policies in response to this new crisis. According to him "it is essential that economic policies respond decisively, provide targeted support to the most vulnerable households, companies and affected sectors, and provide certainty", both through supranational European policies and national fiscal policies.

 Some highlights from the Governor's speech:

  • The final magnitude of the conflict's effects will depend on the policy response from the authorities. In his view, joint European action is again the most effective way forward.
  • European authorities' response should focus on the short term, to mitigate the most immediate economic effects, and in the medium term, to increase Europe's strategic autonomy in energy and defense. Public support should focus on supporting the most vulnerable corporate and households, and on making the necessary investments to reduce energy dependence and increase our defense capabilities at European level:
    - The European Commission's recent “RePowerEU” plan to reduce Russian gas demand by 60% by the end of 2022 foresees the possibility of temporarily relaxing the framework for state aid to the business sector and setting some temporary caps on retail electricity prices.
  • Domestic fiscal policy needs to act in a very granular and targeted way: Subsidies should be targeted at lower income households, which are hit hardest by inflation, and at the most energy-intensive companies. It should be selective and temporary so as not to further increase the structural deficit. The current high inflation context justifies that support should be selective and that a general fiscal impulse should be avoided.
    - Regarding inflation, the governor points out that the widespread use of automatic indexation clauses in expenditure items should be avoided, and it is necessary to reach an incomes pact (which is already taking place in practice) in which the costs of the current crisis are shared among economic agents.
  • Need to accelerate European integration if we want the EU to be a relevant player on the global stage, through:
    - The creation of a common and permanent fiscal capacity in the euro area, Lessons learned from our fiscal response to the war and from the NGEU and SURE programmes will be relevant.
    - Further financial integration, through:
    Creation of a European safe-haven asset. Pan-European bond issues to finance the NGEU along with any that might be issuance for the invasion of Ukraine are an important step in this direction.
    - Completing the Banking and Capital Markets Union, which would increase the degree of risk sharing in the face of asymmetric shocks, avoid financial fragmentation, establish a European deposit guarantee mechanism and a common framework for the resolution of systemic crises.

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