The finance ministers of the eurozone have confirmed that governments in the currency area will keep their expansionary fiscal policies in place throughout 2021. In the short term, this means that governments will be free to spend and borrow without pressure from the European Union to change direction. In the long run, it means that sovereign debt levels across the eurozone will continue to grow, raising questions about their sustainability and making it hard for EU institutions to come up with comprehensive policies to boost growth. In a Dec. 16 Eurogroup meeting, finance ministers of the 19 members of the eurozone agreed to continue introducing stimulus measures in 2021 to boost economic growth, protect jobs and cope with the COVID-19 pandemic. The ministers praised the expansive measures that were taken in 2020 and supported their continuity next year.  

• In a joint statement, the eurozone governments declared that “the Eurogroup agrees that a supportive fiscal stance in the euro area for 2021 is appropriate, given the output loss to date and downside risks,” and that “fiscal policies should remain supportive in all euro area member states throughout 2021.”
• The statement also declared that “most measures in 2020 focused on the emergency response, addressing the public health situation and compensating workers and firms for income losses due to lockdown measures and supply chain disruptions,” and that “the focus of the policy response is gradually shifting towards supporting the economic recovery.”

The finance ministers have warned that the economic rebound in Europe will be uneven, in line with previous predictions that northern European countries will recover from the 2020 losses faster than those in the south. This will make it harder for institutions like the European Central Bank (ECB) and the European Commission to find consensus on new measures to cope with the long-term economic impact of the COVID-19 pandemic. If northern economies start performing better than their southern peers, they could resist the stimulus measures in the European Union and demand their progressive lifting. They could also increase their demands for southern governments to introduce structural reforms in exchange for loans and grants from the European Union. 

• In their statement, the finance ministers admitted that “the recovery is expected to be incomplete and uneven across member states, and the economy continues operating below potential.” 
• On Dec. 10, the ECB announced that it would increase its emergency asset-purchase program by 500 billion euros and keep it in place until at least March 2022, in an attempt to boost economic growth in the eurozone. 
• Reacting to the ECB’s announcement, the president of Germany’s Bundesbank, Jens Weidmann, said it was “crucial” that the amount of government debt held by the ECB doesn’t become too large. According to Weidmann, too much ECB intervention in debt markets could “level out the differences in the risk premiums of government bonds” and “weaken market discipline.”
• During the debate over the creation of a 750 billion euro COVID-19 recovery fund in the European Union in June and July, the Dutch government demanded loans and grants from the fund be connected to fiscal discipline and structural reforms in the receiving countries. 

The current consensus on stimulus measures means that eurozone countries with high debt and deficit levels will not be under pressure from the European Union to cut public spending in 2021. In a longer timeframe, however, it means that their debt levels will increase and become harder to reduce, which could worry investors. In March, the European Commission announced that it would temporarily suspend the enforcement of its Stability and Growth Pact, which establishes debt and deficit limits for EU members. This has allowed national governments to introduce expansionary policies to boost growth and protect jobs during the COVID-19 pandemic. Brussels has suggested that it does not plan to enforce the pact in 2021 either, which will help governments mitigate the financial fallout from the ongoing pandemic.  

• In 2020, sovereign debt will exceed 100% of GDP in 7 of the 19 members of the eurozone. In Greece, it will exceed 200% of GDP. 
• In November, the European Commission warned Belgium, France, Greece, Italy, Portugal and Spain (all of which already had high debt levels before the pandemic) that they should ensure fiscal sustainability in the medium term.
• The Eurogroup also warned that EU members should “pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability.”
• In recent years, ECB intervention in debt markets has kept borrowing costs for eurozone countries within tolerable margins. But the combination of deeper fiscal deficits and higher debt levels in a context of low economic growth could, in the future, raise concerns among investors about the sustainability of debt, particularly in southern Europe.