BRUSSELS — European officials sighed with relief Monday after new data suggested the region will avoid an economic recession.
But all eyes are now turning to what the bloc will do with sizeable government debt piles in the EU amid tentative signs of an economic recovery.
Back in November, the European Commission, the executive arm of the EU, warned that the euro area could be about to enter a recession — defined by two consecutive quarters of contraction in economic performance. But on Monday, the institution said this was no longer the case thanks to government support and an easing of energy costs.
The euro zone is now expected to have reached a GDP (gross domestic product) rate of 3.5% in 2022, rather than the 3.2% estimated in November. The outlook for this year is also better with an expected GDP rate of 0.9%, compared to the 0.2% growth rate forecast just three months ago.
"The slowdown in momentum in the third quarter turned out milder than previously estimated, then in the fourth quarter the EU economy stagnated instead of the 0.5[%] contraction expected in the autumn," Paolo Gentiloni, the EU's commissioner for economic affairs, said during a press conference Monday.
Despite the good news, there's plenty of work for the finance ministers in the months ahead — including figuring out how to adapt their currently loose fiscal policies to a new economic environment.
"We need to come to grips with what is the reform of the stability and growth pact in a changing economic environment," Sigrid Kaag, the Dutch minister for finance, told CNBC in Brussels.
"The outlook is less gloomy than what we had feared — it also shows for a number of countries our measures have had actually an impact to counter inflation — but this is not sustainable in the medium-term. So we need to steer the course and we need to make choices, some of them are difficult," she said.
European governments have adopted loose fiscal policies since the coronavirus pandemic hit in 2020 — the argument at the time was that nations couldn't focus on bringing down their debt levels or correcting their deficits because they needed to support their economies amid such an extraordinary economic shock.
The same argument applied in the wake of Russia's invasion of Ukraine with governments providing help over energy bills, among other issues.
However, the idea is to end these looser stances this year — meaning they will have to focus on bringing down debt levels again in 2024. Kaag said that doing so is a question of "credibility" toward the financial markets.
Why is it so tricky?
Euro nations do not want to return to the same old financial rules. They all agree the fiscal rulebook, in place since 1993, needs to be reformed again.
But Germany is not happy with the latest proposals. It's raised doubts about having the European Commission prepare national plans for debt reduction in connection with the individual governments, meaning the whole process could be in doubt.
Speaking to CNBC, Spanish Minister for the Economy Nadia Calvino said she expects a resolution in the second half of the year.
"We have a lot of work to do, but the key thing really is that while the debate in relation to the fiscal rules will continue, I am confident that we will have a clear consensus regarding what budgetary policy for this year and next year will look like," Paschal Donohoe, who chairs the meetings among the 20 finance ministers of the euro zone, told CNBC earlier on Monday.
Market players will be monitoring what finance ministers will decide in the coming months. Correcting high levels of public debt is key, particularly when borrowing costs are higher.