Brussels The EU Commission’s proposal for a reform of European debt rules has met with strong resistance. The economic policy spokesman for the EPP group in the European Parliament, Markus Ferber (CSU), criticized on Wednesday that the Brussels authorities want to give the member states more flexibility in reducing debt.
“We are heading towards the next sovereign debt crisis at high speed,” said the conservative politician. “What we don’t need now is more flexibility in the debt rules.” The problem with the stability pact is that it is not effectively enforced. “The Commission needs real instruments of torture, which it is willing to use.”
Federal Finance Minister Christian Lindner (FDP) also has reservations. The Commission’s proposal contains something worthy of support, but there is still a great need for discussion among the member states, he said on Wednesday. Uniform fiscal rules would have to apply in the monetary union. “That has to be achieved consistently.” A unilateral relaxation of rules would be “unbalanced.”
The employer-oriented Institute of the German Economy (IW) also warned of the danger “that the Commission uses its announced great discretion and acts too politically”. Therefore, a narrow framework with binding minimum standards is needed for the individual debt plans, write the IW economists Samina Sultan and Jürgen Matthes. Independent institutions such as the European Fiscal Council or the ESM euro rescue package would also have to be involved in monitoring.
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Dutch Finance Minister Sigrid Kaag welcomed the Commission’s proposal as the “first step in modernizing” the Stability Pact. The stronger focus on medium-term goals and the greater national say are positive, said the left-liberal politician. However, she also warned that these must be linked to “effective control”.
>> Also read here: What the new EU debt rules look like and what concerns there are
EU Commission Vice-Vice Valdis Dombrovskis and EU Monetary Affairs Commissioner Paolo Gentiloni presented a 28-page paper with their reform proposals on Wednesday afternoon. This is a “realistic basis” for the further discussion of the member states, said Dombrovskis. If there is a political consensus among the governments by then, a draft law will be presented in the first quarter of 2023.
As a key innovation, the Commission is proposing to abolish the one-twentieth rule. This stipulates that over-indebted countries must reduce their total debt below the Maastricht upper limit of 60 percent of gross domestic product within 20 years. In view of the sometimes three-digit debt ratios after the corona pandemic, this goal is considered unattainable for a number of European countries.
“We cannot ignore the differences between member states,” said Gentiloni. “We should therefore give up the unrealistic requirement of the one-twentieth rule.” This assessment is shared by most member states, including the federal government.
Instead, in future each country should agree a tailor-made, multi-year debt reduction plan with the Commission. Its requirements vary in severity, depending on how heavily indebted the country is.
Countries are divided into three groups
The states are divided into three categories: In the first group are countries with a national debt of more than 90 percent of the gross domestic product. These currently include Greece, Italy, Portugal, Spain, France, Belgium and Cyprus.
In the second group are the countries whose public debt is between 60 and 90 percent. This includes, for example, Germany (66 percent). Finally, the third brings together those who remain below the Maastricht ceiling and are therefore not considered to be over-indebted.
All over-indebted states must achieve a sustainable debt reduction path within four years. The annual new debt may not amount to more than three percent of the gross domestic product. In the event of deviations from the agreed debt reduction path, a deficit procedure is initiated against the highly indebted countries, which places a country under the stricter supervision of the Commission.
The country is one of the countries with the highest debt ratio in Europe.
(Photo: action press)
Upon request, the adjustment period can be extended to seven years if the government can demonstrate concrete structural reforms or investments that contribute to long-term debt sustainability. Any national debt reduction plan must be approved by a qualified majority in the EU Council.
>> Also read here: It’s too early for another debt fund
Another innovation is that the spending rule is to be the sole benchmark for the debt reduction path in the future. So far, the stability pact has been primarily based on the structural budget balance. The expenditure rule is “better measurable and controllable”, praise the IW economists Sultan and Matthes.
Gentiloni spoke of a “credible balance” between the various goals of the EU. On the one hand, the aim is to ensure debt sustainability and, on the other hand, to enable urgently needed investments in the green transformation of the economy. Both are closely related.
Greens and SPD are calling for far-reaching reform
The more reforms and future investments a country plans, the slower it can reduce its debt, said the currency commissioner. However, there should not be a golden rule for green investments, as demanded by the German Greens, among others. Then certain investments would have been excluded from the debt calculation.
Green MEP Henrike Hahn therefore finds the Commission proposal too weak on this issue. “Without crucial public investment in the coming years, achieving our climate targets is all but impossible,” she said. The Commission fails to recognize that climate risks will be one of the main drivers of future debt sustainability. However, she welcomed the fact that there should be national debt reduction paths in the future and that the budget plans should be integrated into the national energy and climate plans.
The economic policy spokesman for the SPD in the European Parliament, Joachim Schuster, also called for a more far-reaching reform. While the Commission recognizes the massive need for investment, it does not give an answer as to how this should be financed. Many countries are overwhelmed with the green conversion of their economy.
“A reform of the existing rules must make the path to a climate-neutral Europe easier and not more difficult,” said Schuster. That is why a permanent investment mechanism is needed, with a volume of one percent of European economic power. “This could be financed by community bonds and additional EU funds, such as a financial transaction tax or the global minimum tax.”
>> Also read here: Lindner’s push for a debt rule for Europe has a major gap
In view of the broad criticism from different camps, it could still take a while before the reform is implemented. In December, the finance ministers want to deal with the Commission’s proposal, and the differences between the countries will become apparent again.
The “hawks” are pushing for independent institutions like the European Fiscal Council to help with monitoring. They also demand that the Commission can withhold EU funds as a sanction if a country deviates from its debt reduction path. The latter is not mentioned in the Commission proposal because countries like Italy are strictly against it.
Actually, the Stability Pact should come into force again in 2024. It has been suspended since the beginning of the corona pandemic. However, Brussels considers it unlikely that the legal acts will be changed by the end of 2023. According to EU circles, the reform is technically complicated and politically controversial. “That may take a few years.”
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