EU advises temporary, targeted government spend on COVID recovery

By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone governments should keep spending next year to support an economic recovery from the slump caused by the COVID-19 pandemic, but make sure the extra stimulus is temporary and targeted, the European Commission recommended on Wednesday.

"As the health emergency persists, fiscal policies should remain supportive in all euro area Member States throughout 2021," it said in formal recommendations that will be endorsed by finance ministers.

"Policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted," said the recommendations that will shape fiscal policy in the 19 countries sharing the euro.

Euro zone governments sent the Commission their draft budget plans for 2021 last month for checks on whether they are in line with EU rules. The EU executive arm said on Wednesday some of the planned spending by France, Italy, Lithuania and Slovakia were not temporary or matched by offsetting measures.

The Commission also cautioned Belgium, France, Greece, Italy, Portugal and Spain that their already high public debt would worsen during the pandemic and so they should pay attention to fiscal sustainability in the medium term.

The Commission also recommended that governments maintain the credit channels to the economy and support viable companies as long as necessary during the unprecedented crisis.

To help banks, which will see a rise in the number of loans that are no longer serviced, the Commission suggested that governments develop secondary markets for non-performing loans.

The Commission warned the pandemic was increasing economic divergence between euro zone countries due to differences in the intensity and timing of the pandemic shock, in the size of most the affected sectors such as tourism or hospitality, and in the fiscal space available.

"These differences impact confidence, investments and growth prospects as well as regional disparities that pre-existed but may be exacerbated," the Commission said.

"Over the longer-term, the current COVID-19 crisis risks having permanent negative effects on potential growth and income gaps due to lower human and physical capital... that could translate into even lower growth in labour productivity and incomes," it said.

(Reporting by Jan Strupczewski; editing by Philip Blenkinsop)