The European Commission's view is that fiscal policy should move from supportive to neutral in 2023, but that they must be ready with more cash if the war in Ukraine makes it necessary, according to BRUSSELS euro zone finance ministers.
Finance ministers from the 19 countries sharing the euro meet on Monday to discuss their fiscal stance next year, as Russia's invasion of Ukraine increases uncertainty and risks to EU economic growth that is rebounding after the pandemic.
A senior euro zone official said it was going to be more difficult than we thought it would be a few weeks ago.
The Commission recommended on March 2 that EU governments should move to a neutral fiscal position next year from a supportive position, but be prepared to adapt quickly if the Ukraine crisis creates new challenges for the rest of Europe.
Italy and Greece should focus on tightening fiscal policy while low debt ones focus more on investment, as EU government borrowing limits are likely to be suspended in 2023, according to the Commission.
The situation is changing fast and we need to update the picture as new information arrives. The situation in Ukraine is a huge human tragedy. It's likely that the euro area's impact will be serious but bearable in economic terms, the official said.
The expectation is that growth will continue but at a slower pace, with stronger inflation pressure than anticipated, the official said.
Last week, the European Central Bank predicted that growth in the euro zone will be 0.5 percentage point slower this year because of the war in Ukraine, but still close to a respectable 3.7%, slowing to 2.8% in 2023.
The ECB forecasts that inflation will average 5.1% in 2022 and 2.1% in 2023, well above the bank's target of 2.0%.
There are good reasons to be optimistic about the resilience of our economies but we are in a situation where uncertainty is very high and downside risks have increased so we need to update our assumptions and adjust our policies as needed, the official said.
The euro zone ministers will not discuss sanctions imposed on Russia, because they will do that with their non-euro zone EU colleagues on Tuesday.
The 27 EU ministers will discuss completing the EU's banking union, which is missing a European deposit insurance scheme EDIS, because governments want to agree on ways to reduce risks in banks.
The banking union has a role in the discussions, including making banks diversify their bond portfolios to lower risk and cross-border integration and diversification of banks.
The chairman of euro zone finance ministers Paschal Donohoe is likely to present an initial plan to reach a deal on EDIS that will include several stages at which more risk sharing via a deposit scheme would be matched by more risk reduction, the official said on Monday.
The official said that a fully-fledged plan of how to arrive at EDIS could be completed in April and a deal could be reached in June, but he cautioned that would not be the end of the discussion.
It is not yet going to be a detailed agreement on all aspects of the banking union. He said that it's going to be a political commitment of member states to a set of broad elements of the banking union and a number of principles and processes that will guide the legislative work that will ensue.