By Jan Strupczewski

BRUSSELS, (Reuters) – Euro zone finance ministers will likely endorse Monday’s European Commission view that fiscal policy should shift from supportive to neutral by 2023. However, they should be prepared with additional cash in case of war in Ukraine.

As Russia invaded Ukraine, the financial ministers of the 19 Euro-member nations met on Monday to discuss the fiscal stance for the next year. The invasion created uncertainty in the EU and posed a threat to the recovery process.

According to a top official of the Euro zone, “It will be harder than we thought just weeks ago,” the representative for preparation of the talks.

On March 2, Commission recommends that EU governments shift from a supportive to a neutral fiscal position next year. However, they should be prepared to adjust quickly to new threats if there is a crisis in Ukraine.

The Commission stated that EU borrowing limits will likely remain suspended for 2023. However, high-debt countries like Italy and Greece need to continue tightening their fiscal policies, while those with lower debt should focus more on investing.

The situation in Ukraine is changing rapidly and it’s important that we keep the public informed about any new developments. First and foremost, the situation in Ukraine represents a terrible human tragedy. According to the official, the impact on the euro zone’s economy is expected to be significant but bearable.”

According to the official, “the expectation right now is that growth will be sustained but at an observably slower pace than anticipated and with higher inflationary pressures.”

BANKING UNION

Last week, the European Central Bank predicted that growth in eurozone will slow by 0.5 percent this year due to war in Ukraine. However, it still came in at 3.7%. It is expected to slow down to 2.8% in 2023.

However, inflation is expected to be at an average of 5.1% by 2022 and 2.1% by 2023 according to the ECB’s forecast. This is well beyond the bank’s goal of 2.0%.

The official stated that there are reasons to believe in the economic resilience of our countries, but they are also facing uncertainty and increased downside risk. Therefore it was important to stay up-to-date on our assumptions and adapt our policies as necessary.

Because they are meeting with non-eurozone EU counterparts on Tuesday, the euro zone ministers won’t be able to discuss Russian sanctions.

On Monday night, the 27 EU ministers will meet to discuss completion of EU’s bank union. This is lacking a European Deposit Insurance Scheme (EDIS). Because governments are keen to find ways to lower risk in banks, they want to first agree to reducing them.

Another element of the discussion is that banks should diversify their sovereign debt portfolios. This will lower risk as well as cross-border integration.

Paschal Dohoe will likely present a plan to reach an EDIS deal Monday. This initial plan would include multiple stages in which greater risk sharing via deposit schemes is matched with more risk reduction.

According to the information from the first plan, an updated plan on how to get there could be available in April. The official suggested that they could reach a deal in June. But he warned that even that wouldn’t be the end.

The agreement is not expected to cover all components of the banking Union. He said that it would be a political commitment by member states to certain elements of the banking Union and to some principles and processes that will guide the subsequent legislative work.