MNI INTERVIEW:Eurozone Debt Reform Essential, But Treaty Stays

The eurozone should reform strict rules on borrowing but changing European treaties is too hard and key provisions including a 60% debt-to-GDP limit cannot be ignored, a senior German member of the European Parliament's biggest conservative force told MNI.

In the latest sign of an evolving consensus on the need to overhaul the European Union's Stability and Growth Pact, Markus Ferber, spokesman for the EPP group in the European Parliament's Economic and Monetary Affairs Committee, said some countries' debt levels "could quickly turn out to be unsustainable once the European Central Bank tightens monetary policy.

"We should keep in mind that countries like France and Italy already had worryingly high sovereign debt, before Covid," Ferber said in emailed responses to questions. "Once rates rise and the ECB starts tapering, current debt levels could quickly turn out to be unsustainable for many countries.

While SGP reform is "definitely required", treaty changes "are not in the cards", and the 60% limit as well as the 3% of GDP limit on annual borrowing should still feature prominently as reference values.

"But how we approach these numbers matters and I definitely see room for manoeuvre," he said. "The treaty provisions provide important guidance, but leave enough room to set up a more sensible framework. That being said, devising a new set of rules will be extraordinarily difficult as the positions about how exactly to reform the SGP are wide apart."

COMMISSION DRIVE TO EASE RULES

European Commissioner for Economy Paolo Gentiloni has called for the SGP rules to be significantly relaxed, but the Commission now accepts that it may have to do so without changing treaties, as his chief of staff, Marco Buti, acknowledged to MNI in July. (See MNI INTERVIEW: EU Can Ease Debt Rules Without Treaty Changes.)

While the Commission is due to launch a consultation on SGP reform this autumn, Ferber cautioned against launching a major debate before Germany's general election on Sept. 26, added that French elections in spring 2022 may also complicate the schedule for agreeing the broad outline of reform.

"When it comes to finding compromises in Europe, it usually helps if France and Germany can coordinate a broad general line. So, in that sense, the timing of the French presidential election is not ideal, but you cannot put European policy making on hold for too long. So, we have to deal with that," Ferber said.

Ferber thinks that the legislative process of reform "will take quite a while" and that it will not be ready by the time the escape clause temporarily exempting member states from the SGP during the Covid crisis is deactivated, which is expected to be at the start of 2023.

Rather, a "pragmatic approach" would probably be to have the reform of the fiscal rules enter into force a year after that, he added.

Agreement on fiscal reform could be more difficult if Germany's Greens or the centre-left SDP join in a coalition with the conservative CDU after the September elections, he said.

"Both, Greens and Social Democrats, want to water down the fiscal rules and would probably be a welcome ally for some of the Southern European countries with a similar agenda. That would indeed make it much more difficult to broker a deal inside the coalition governing Germany."