Press conference - Eurogroup

08:37 - 13:31

Kyriakos Pierrakakis

Defense spending is obviously increasing as part of a broader policy vis-à-vis which we need to further invest on defense, from 1.3% of GDP to 2.4. And the cost of energy, the cost of oil or the cost of natural gas has obviously also increased since then. And public debt also remains high and in certain member states it is also increasing. So, greater needs, higher borrowing costs, tighter fiscal space. That is the reality within which all of us need to operate.

Recent developments in sovereign bond markets remind us that investors are becoming more sensitive to fiscal risks and are seeking greater compensation for uncertainty surrounding the credibility and pace of fiscal consolidation, particularly in countries facing more challenging fiscal positions. The answer cannot simply be more borrowing. Nor can it be across-the-board spending cuts that weaken essential public services. We must achieve more with the resources that we already have. We need to reassess spending priorities, improve the efficiency of our tax systems and strengthen our overall fiscal governance.

Analysis shows that there is significant room for improvement. Greater efficiency is no substitute for fiscal consolidation. It is, however, an essential complement to it.

Today's discussion confirmed our shared commitment to sound public finances and later this year the Eurogroup will assess Member States' draft budgetary plans and the overall fiscal outlook for the euro area. We will also continue our dedicated discussions on public spending priorities, optimizing tax revenues and fiscal governance. Third item on the agenda was the Capital Markets Union. We conducted the second annual review of the 2024 statement as part of the Savings and Investment Union agenda. We focused on supplementary pensions, savings and investment accounts, pension tracking systems and equity investment accounts.

There is progress and this progress is quite encouraging, I have to say. Retail investor participation is increasing, particularly in countries where it was previously lower. Most Member States have taken steps to increase participation in supplementary pension schemes through automatic enrollment or incentives and at the same time new investment products are being developed alongside greater cooperation between Member States. But we need to move faster. Europe has substantial savings that are not being channeled into the real economy to the extent that they could be.

It is not enough anymore to describe the investment gap, we must close it. We need deeper and more integrated capital markets, more choices for savers and better access to finance for European businesses.

The measure of our success will not be how many initiatives we announce, but how much investment we can actually mobilize. That is why we will continue to promote national initiatives that complement common European action. We also discussed international economic developments ahead of next week's annual meetings of the International Monetary Fund and the World Bank in Bangkok. Our biannual discussion focused on exchange rates and global economic imbalances and tomorrow at the Ecofin we will examine a broader range of issues. The appreciation of the euro over the previous year has largely reversed in recent months.

Major surplus and deficit economies need more balanced growth models and the euro area has contributed to this global adjustment. But the effort cannot be one-sided. Major economies must shoulder their share of responsibility as their economic and exchange rate policies also have consequences for us, also have consequences for Europe. Finally, we launched the process of selecting a successor to Isabel Schnabel on the Executive Board of the European Central Bank. Ms. Schnabel announced on the 24th of September that she would step down before the end of her term, leaving the ECB on the 3rd of January 2027.

The appointment is made by the European Council acting upon recommendation from the Council of the European Union and after consulting the ECB and the European Parliament. The selection of the candidate takes place at the Eurogroup and we have thus set the 28th of October as the deadline for submitting candidacies so that we can consider the matter at our next meeting. Ladies and gentlemen, Europe has demonstrated that it can respond to even the most difficult of circumstances. Today, however, we cannot simply rely on what we have achieved in the past. We must prepare for what lies ahead.

Europe has the power to shape its own future, we must have the courage and the determination to use that power. That is our responsibility in the Eurogroup. To turn our common will into common European strength. Thank you so much and I will now give the floor to Valdis.

13:31 - 19:12

Valdis Dombrovskis

Thank you Kyriakos, good afternoon everyone. So I will begin with our discussions on energy. European economy continues to face the consequences of the energy price shock that began far beyond Europe's borders. So far our economy has stayed resilient, but in medium to long term it is clear that the only structural solution is to reduce our dependency on fossil fuels.

The Commission has put forward proposals in this regard in recent months. We have also broadened the flexibility under the national escape clause for defense to cover measures to enhance energy security. The Commission has also now positively assessed the requests of both Greece and Italy to make use of this broadened flexibility. In the short run, unfortunately, price pressures may continue as we move into winter. It is important that any short-term measures to alleviate their impact are targeted at the most vulnerable.

Broad measures would not only be fiscally too costly, they would also drive up energy demand and prices and thus fail to help those in need. Allow me also to say a few words on a broader fiscal context. In recent weeks, we have seen rising yields in global sovereign bond markets and increasing spreads within Euro area. So, fiscal prudence is required.

Member states should stick to the targets of their medium-term fiscal structural plans and use flexibility available under the broadened national escape clause with caution. It's also worth noting that our new fiscal framework already contains various elements of flexibility to cater for current situation in a balanced manner. Indeed, a key feature of our fiscal framework is counter-cyclicality. This means, for example, that revenue shortfalls due to economic slowdown should not be compensated for. Also an increase in interest expenditure should not be compensated for within the ongoing medium-term plan.

And this is clearly relevant in current juncture. Finally, upward inflation pressures are already considered as part of an overall assessment of relevant factors when assessing member states' compliance with fiscal rules.

So, to summarize, we cannot come with new fiscal flexibilities all the time. In fact, this could cast doubt on our collective resolve to uphold the rules-based fiscal framework at a time when a credibility of our commitment to fiscal sustainability is a vital asset. So we should not put that at risk. This brings me to our discussions on quality of public finances. This is a priority for all member states.

On the one hand, the fiscal space is much tighter than in the past. On the other, we face urgent spending needs, particularly to strengthen our defense capabilities, but not limited to that. This makes improving the effectiveness and efficiency of public finances a priority for here and now. First, we should improve the composition of budgets so that they do more to support growth and keep unproductive or distortive spending to a minimum. Second, we should look closely at individual spending categories so that we can achieve our policy objectives in a most cost-efficient way.

And third, budgets need to become more adaptable to changing circumstances and priorities.

The potential gains are significant. A better composition of budgets could generate fiscal gains of up to 3% of GDP. And in addition, higher spending efficiency could add a further 1.5% of GDP over the medium term. In short, spending better creates space for spending more of what matters most. It creates savings and gains that we simply cannot afford to ignore.

Finally, the Commission presented its assessment on the developments on the progress of the Capital Markets Union based on developments in different Member States. The progress reported was encouraging, but we need to further lift our level of ambition to boost returns on citizens' savings and to provide our companies with the funding they need. Thank you.

19:12 - 22:42

Pierre Gramegna

Good evening everyone again.

I'd like to echo obviously the discussions that we had today and many things have been said by Kyriakos and Valdis, so I'll be brief. Let me first talk about the impact of energy markets on the euro area economy because that was the discussion that took most time. Higher energy prices are adding to inflationary pressures. If this continues, it will further contribute to tighter financing conditions and higher borrowing costs for governments. Compared to 2022, the shock is smaller, but fiscal space is more constrained and interest expenditure is rising.

This argues for targeted, temporary and credible responses, thus underpinning the credibility and the compliance with the Stability and Growth Pact. Broad-based support measures are more difficult to justify when borrowing costs are higher and debt vulnerabilities remain elevated in many countries. At the same time, this episode reinforces the case for investing in Europe's energy resilience through diversification, stronger networks and deeper market integration. The discussion on effectiveness and efficiency of public finances is a very important topic for the ESM.

Today's discussion showed that there's a lot to learn in this. Higher interest costs, increased defense spending, and the end of escape clause flexibility after 2028 mean that governments will need to make more effective use of public resources that are limited. Let me highlight what I see with four guiding principles. First, governments should collect more of the taxes that are already due before considering new taxes, and digitalization can help improve compliance, as Greece has demonstrated under the leadership of Kyriakos Pierrakakis. Second, budgets are characterized by spending that is already committed from the outset: pensions, healthcare, public sector wages, and so on.

So this leaves little room to respond when challenges arise. ESM research shows that countries with less flexibility often end up cutting investment instead of other things. So my message is simple: spending should be reviewed regularly, investment protected, and money should start shifting towards the priorities of the future right now.

Third, policymakers need to prepare for the implications of artificial intelligence, including possible shifts in tax bases and their impact on public resources. Finally, Europe should maximize the value it derives from higher defense spending. Defense will cost the euro area about 45 billion euro more per year until 2035 to reach NATO's 3.5% target. The Eurogroup discussion ticked a little bit this discussion on, but the discussion will go on next month in the Eurogroup and we look forward to that discussion. Thank you.

22:42 - 23:02

Speaker 1

Thank you very much. With this we can open the floor for questions, first in the room, then if time permits online, but I would already like to flag that the evening continues for the speakers with another engagement. Maria.

23:02 - 23:37

Maria Vasiliou

Thank you for the floor, Maria Vasiliou, Greek newspaper Ta Nea. A question to Commissioner Dombrovskis.

As I understand from what you said, the Commission says an absolute no to the requests by Italy and Greece for further fiscal flexibility. Thank you.

23:37 - 25:05

Valdis Dombrovskis

So what I'm emphasizing is a need for fiscal prudence, especially in a light of current bond market developments. At the same time, I also was mentioning that there are elements within the fiscal framework which already help and also acknowledge the issue of higher inflation, impact of higher inflation on the net expenditure growth trajectory. Obviously, we'll have a deeper look on the requests from Italy and Greece. Actually, I had a conversation with both Minister Pierrakakis and Minister Giorgetti today to discuss this situation.

So obviously we'll have more in-depth looks into this. And also as I had been emphasizing before, also from Commission's side of course we continue to follow the developments closely and stand ready to propose response measures as necessary. But also it's worth noting that large part of the response measures also concern the functioning of energy markets. And actually in today's discussion we also touched upon those elements. Thank you.

25:05 - 25:13

Speaker 8

Yes, Frédéric.

25:13 - 25:51

Frédéric PUCHOT

Frédéric Puchot, Agence France-Presse. You mentioned the tension on the bond markets. We have seen rising yields in the past few weeks as you all said, and also a widening of the spread between France and other euro area economies, partly due to France's fiscal situation and the new deficit forecasts. Has it been discussed? And last month in Dublin, President Pierrakakis, you said that you were concerned but not anxious.

Are you getting anxious?

25:51 - 27:13

Kyriakos Pierrakakis

Thank you. Thank you for your question. Well, I'll use a different terminology today. I'll say that I'm mindful but not alarmed. And let me say why I say this.

First of all, context. We have a challenging global environment.

Pierre mentioned it, Valdis mentioned it. There are pressures overall because of elevated energy prices. We have increased volatility, expectation of higher interest rates, and increased demand for private bond issuance and public debt as well. So this is creating upwards pressures all over the world overall. That's my first observation.

My second observation: differentiation in terms of the bond spreads we typically see in this context as a function of how markets view fiscal fundamentals and economic fundamentals in every country. That is always the case. Differentiation is not fragmentation. And this is why I'm saying that being mindful and being alarmed are completely different things. We are mindful, we are attentive, we are vigilant, but not alarmed.

And let me add another point without commenting upon market movements for any specific member state, that we have confidence in France's commitment vis-à-vis sound public finances, and I have personally a lot of confidence in my good colleague Bruno Le Maire.

27:13 - 29:25

Valdis Dombrovskis

Yes, if I can come in here.

So, first of all, what we see is that sovereign bond yields have substantially increased over the last months, and this has been the case across the globe. And there are objective reasons for this, linked to the strong supply of long-term bonds, in particular linked to the high fiscal deficit in the United States, and also issuance of bond issuances by private companies, notably in the area of AI. It also reflects the expectations that central bank rates will need to stay higher for longer. So, this is part of what we are seeing is part of the broader developments. But it's also true, however, that more recently, markets are increasingly differentiating across countries within the euro area, and the spreads within the euro area have widened, and in particular countries with high debt are more vulnerable.

And in this environment, it is essential that all member states, and in particular those with high deficits or debts, implement prudent fiscal policies.

And from that point of view, putting in place sound budget for the next year will be important to ensure this predictability and credibili- credibility, and to reassure markets. And well, I'm also in contact with Minister Lescure on this. We know that the government has put forward ambitious draft budgetary plan for 20 2007. And it's important that obviously it's that there is cl- clarity on on this budget for 2027 and that it's a fiscally sound budget.

29:25 - 29:33

Speaker 9

Jorge.

29:33 - 30:23

Jorge Valero

Jorge Valero, with Bloomberg. A question on the ECB process. Eurogroup President, you said that the deadline to submit candidates is 28th of October. Well of course the process is to pick a candidate, so when the candidate is going to be elected, will it will it be the meeting on the 9th of November? And if not, why?

Will it be because you will favor a package approach and you want the leaders to weigh in in the two summits that they have in November? And if anybody, any minister asked President Lagarde for a bit of clarity about her future at the ECB presidency and if this is a factor that you also consider for the process? Thank you.

30:23 - 30:42

Kyriakos Pierrakakis

My first answer is that hopefully the selection will happen at the November meeting. And my second part of the answer is that it was a very short agenda item in the discussion in terms of time.

30:42 - 30:44

Speaker 11

Yes, Paula.

30:44 - 31:20

Paula

Thank you. To President Paschal Donohoe, one is if you could react to what I understand is a rather no to the request of additional flexibilities, given that Prime Minister Mitsotakis made this specific request to widen the national escape clause to include other types of expenditure. And secondly, I'm going to try to extract a little bit more information. So if you want to decide on the 9th of November for a replacement for Isabel Schnabel's job, does that mean that you expect to have a decision on the other roles as well? Thank you.

31:20 - 32:39

Kyriakos Pierrakakis

As a politician, life has taught me not to make predictions about selection processes. What I can tell you is that right now we're opening up a selection process for a single position with a specific timeframe which I announced from this podium. Now, with regards to the first topic, what I can say, I'm at this podium obviously as Eurogroup President and not as the Greek Minister of Finance, even though I have both posts. But as Eurogroup President, what I can tell you is that there was a very interesting and engaging discussion in the room. Some colleagues reflected positively upon the specific proposals made by Greece and Italy, others had more reservations.

Let me tell you what we all agree upon. We all agree upon the fact that we need to protect citizens, households, people who are at need throughout Europe, but fundamentally that we need to preserve fiscal stability and the credibility of our fiscal framework. We simultaneously agree on both. What we're trying to find out is how to strike the right balance between the two, how do we optimally target our policies. And communicating and discussing between ourselves is obviously a very interesting exchange of policies and ideas.

So the discussion obviously will move at the leaders' level as well, but we're both cognizant, we're cognizant of both elements of the equation, as we all should be.

32:39 - 33:12

Valdis Dombrovskis

Yeah, just maybe to reiterate what Kyrakos said, indeed, I would say in this discussion there was broad acknowledgment for the need of this fiscal prudence, and particularly in current juncture. So the discussions we are having and we're going to have, I'd say they are more nuanced and technical on the question of interpretation of certain provisions.

33:12 - 33:17

Speaker 1

Well, I don't see any other questions, which means this is then the end of this press conference. Thank you very much and have a good evening.