MNI: Berlin Squares Off With Brussels Over Fiscal Pact Reform

German objections to European Commission proposals for reform of EU fiscal rules centre on a proposed Debt Sustainability Analysis which would determine tailor-made debt reduction programmes for high-debt nations such as Italy and which Berlin argues is non-transparent and would allow Brussels too much leeway for cutting deals, European officials told MNI.

The Commission’s November 2022 Orientations Paper gave DSAs a central role in its proposed overhaul to make Stability and Growth Pact rules more flexible, but Germany and other countries in favour of fiscal orthodoxy doubt whether this approach would be compatible with EU legislation covering all members of the bloc.

“Germany questions whether DSA should play any role at all in the new system - and that is the key part of the Commission proposal,” one senior eurozone finance ministry official told MNI. “I am not sure it’s possible to replicate every aspect of that and that’s a problem for Germany because if DSA is not understood down to the last detail, then it’s not a rules-based system. And they have a point.”

Germany wants a minimum debt-reduction effort for all states, although it concedes that the existing Stability and Growth Pact rule under which countries with debt over the limit of 60% of GDP have to reduce the excess by 1/20th per year, is asking too much.

Finance Minister Christian Lindner told a meeting of EU finance ministers on Tuesday that his coalition government would only accept limited changes to existing rules, putting them at odds with European Economy Commissioner Paolo Gentiloni, who insists they are unfit for purpose.

ECB FAVOURS CHANGE

But Gentiloni has been successful in rallying Eurosystem central bank governors to his cause, one source told MNI.

European Central Bank President Christian Lagarde, as well as Dutch National Bank President Klaas Knot and Bank of France Governor Francois Villeroy have all recently urged states to rapidly agree new rules in the interest of market stability.

While a draft of the conclusions which EU finance ministers will make on this controversial topic is currently being crafted by member states, only a bland communique will be ready in time for a crunch meeting on March 14.

Sweden, which holds the EU’s rotating presidency, aims to shunt the thorny issue back to the Commission, both allowing the bloc to address other pressing matters in the meantime and also forcing Brussels to come up with a detailed legislative proposal which would hopefully spark serious negotiations, sources said. (See MNI: Sweden Tries To Push EU Fiscal Reform Back To Commission)

“When a proper proposal is there, that is when you really start analysing and deciding what you’re in favour of and what against,” said one European official.

Commission officials remain optimistic of finding enough common ground to present legislative proposals by the end of March or early April. But if they are successful the bloc would immediately face the dilemma of deciding whether to base May’s 2024 annual economic Country Specific Recommendations on the existing rules or a new framework still under negotiation.

In that case Eurogroup President Paschal Donohoe would seek to broker agreement among finance ministers and craft the political communications needed to sell it.