Brussels Ten months is not a long time in politics, especially not in Brussels. This is how much time the Europeans have to adapt their fiscal rules to the post-corona reality. A reform must be in place by the end of the year, otherwise the Stability and Growth Pact will come into force again in unchanged form. For several highly indebted member states, this would mean a sharp austerity course, which could still plunge the EU into a recession.
EU Economic Commissioner Paolo Gentiloni therefore warned at the finance ministers’ meeting on Tuesday to hurry. “We have to make progress,” he said. “The time is not unlimited.” The governments must reach agreement by the EU summit in March so that the Commission can present a legislative proposal as planned in the spring. The European Parliament must finally approve the reform.
The Stability Pact dictates how much debt EU governments can incur. The central benchmarks are the Maastricht criteria (new debt of a maximum of three percent of gross domestic product, total debt of a maximum of 60 percent). The rules were suspended at the beginning of the pandemic, and since then debt levels in several countries have risen to more than 100 percent.
Therefore, the old rules should be revised by the end of the year. However, the 27 governments are a long way from reaching an agreement, as was again shown at the finance ministers’ meeting on Tuesday.
A group of heavily indebted countries, led by Italy, want maximum flexibility in reducing debt. They point out that after the high corona expenditure, billions in investments are now needed for the green conversion of the economy.
Commission wants to relax rules
Other governments, above all Germany and Austria, warn against relaxing the rules. “There is no reason to deviate from Austria’s hard and clear position, which is supported by other countries,” said Austrian Finance Secretary Florian Tursky. There should be “no 150 exceptions” for the countries.
Federal Finance Minister Christian Lindner (FDP) made a similar statement. One is open to changing the rules because there are “new investment needs”. However, it is “imperative” that the debt reduction paths of the individual countries are comprehensible, credible and predictable. “That must not be left to one’s liking.”
The EU Commission presented a first reform proposal last November. The most important change: the one-twentieth rule is to be abolished. So far, this stipulates that over-indebted countries must reduce their debt below the Maastricht limit of 60 percent within 20 years. This is considered unattainable for several countries.
According to the Commission, each country should agree a tailor-made, multi-year debt reduction plan with Brussels. Over-indebted countries must achieve a sustainable reduction path within four years. Deviations from the agreed path would trigger an excessive deficit procedure, placing a country under the Commission’s heightened oversight.
Christian Lindner: “So not capable of approval”
Upon request, the adjustment period could be extended to seven years if the government can demonstrate concrete structural reforms or investments that contribute to long-term debt sustainability.
>> Read here: What the new EU debt rules look like and what concerns there are
The Commission’s proposals go too far for several governments. They are “so not capable of approval” and would have to be changed in essential points, said Lindner. From the point of view of the critics, the Commission should not be given too much discretion.
It is feared that bilateral agreements between Member States and the Commission could turn out to be too generous. The adjustment path of up to seven years is also considered too long, since no government would feel bound by the promises made by its predecessor.
Swedish Finance Minister Elisabeth Svantesson, who currently holds the EU Council Presidency, said hopefully a common ground would be found by the next meeting in March.
Other participants consider this unlikely given the deep differences of opinion. It is doubted that the Commission will be able to present a legislative proposal by April as planned. Also, the dispute should really start as soon as the details are available.
The only hope remains that the pressure on all governments will mount as the end of the year approaches. Dutch Finance Minister Sigrid Kaag emphasized that a renewed suspension of the Stability Pact is not an option. Gentiloni also said that the current economic situation gave no reason to extend the exemption.
More: The EU Commission no longer sees a risk of recession.