MNI POLICY: EU Fiscal Deal Taking Shape Before December ECOFIN

Germany, France, Italy and Spain are within reach of a compromise on overhauling European Union rules on borrowing and public debt, and the bloc’s fiscal surveillance regime is likely to be flexible next year during what could be a long delay turning a new framework into law, MNI understands.

While a deal is still not certain at a crunch meeting on Dec 8, finance ministers are understood to favour the so-called “Danish Model” safeguard, which targets medium-term reductions for countries exceeding debt-to-GDP limits rather than focusing on annual cuts, with precise parameters still to be agreed.

Significant differences remain over deficit reduction. But, while Germany and the “Frugal” states insist on tougher adjustments to structural rather than primary deficits, Berlin seems prepared to allow more time for countries to return to the maximum 3% of GDP, accepting deficit cuts of lower than 0.2% of GDP a year, well below the 0.5% it had initially demanded.

Officials are also understood to be edging towards a compromise under which states could extend the duration of debt-reduction efforts from four to seven years on the basis of commitments to reform and investments already made under the NextGenerationEU programme, providing these are sufficiently ambitious, with Italy certain to qualify.

Italy is also likely to obtain a waiver on the “no-backloading” safeguard for loans financing NextGenEU investments, avoiding the need to compensate for the additional debt with temporary spending cuts. An automatic fiscal adjustment would follow when the investments end in the later years of its debt-consolidation plan. (See MNI: Hopes Rise In Dash For EU Fiscal Rule Deal By Year End)

FLEXIBILITY

If a deal is struck, producing a legislative text will be time consuming, and potentially pose fresh political challenges as details are worked out. Some officials calculate that “Trilogue” talks between the legislate, Commission and member states would have to have concluded by mid-March at the latest in order for the new law to be approved before the European Parliament’s last session on April 25 ahead of June 6-9 elections.

If that is not possible, turning new rules into legislation could be delayed until the second half of 2024, though there is a chance the process might still be concluded in time for the Commission’s assessment of 2025 Draft Budget Plans.

Meanwhile the old fiscal rules contained in the Stability and Growth Pact are due to come back into force in the new year following their suspension due to Covid and the economic effect of the war in Ukraine, which is likely to prompt Excessive Deficit Procedures against several countries including Italy and France in June. As the proposed reforms will retain existing limits capping public debt and deficits at 60% and 3% of GDP respectively, these procedures were inevitable.

But the Commission has made clear on a number of occasions that it will anticipate any political agreement on new fiscal rules before they become law, and its 2023 economic policy recommendations, while following the old Stability and Growth Pact guidelines, have already incorporated officials’ preferences for a more flexible regime.