MNI:Balancing Act To Keep EU Fiscal Reform On Course-Officials

The European Union’s Swedish presidency is trying to draft guidelines for overhauling the bloc’s fiscal rules which are both sufficiently detailed for the European Commission to prepare concrete legislative proposals and vague enough not to antagonise states like Germany, with officials telling MNI that failure to strike the right balance could scuttle hopes for approval of a new regime in 2023.

With Germany and other so-called “frugal” states already bristling at the Commission’s initial proposals, which would grant Brussels powers to design bespoke debt-reduction programmes for countries exceeding borrowing guidelines, failure by the Swedes to forge consensus in their draft communique for the crunch finance ministers’ meeting on March 14 would make it difficult for officials to prepare the detailed legislative plans by early April, the officials said. (See MNI: Sweden Tries To Push EU Fiscal Reform Back To Commission)

Any further delay in the legislative blueprint would dash chances the Stability and Growth Pact reforms could be approved by the European Parliament in time for new rules to be in force when the current fiscal regime comes back into force next year, following the expiry of the waiver granted to help governments respond to the economic challenges of first Covid and then surging energy prices in the wake of Russia’s invasion of Ukraine.

RISKS FOR COMMISSION

The Commission could decide to proceed regardless, but it would be risky.

“The risk is that we have legislative proposals from the Commission that are torn apart, and that won’t look nice, although maybe some states won’t mind,” one official said.

The March 14 communique, known as Council conclusions, needs to keep close to the basic principles of a reform which aims to make borrowing rules more sustainable as well as easier to enforce, the official said.

“There need to be certain things in there to provide guidance to the Commission, ie what to do with the EU’s Multiannual Framework and how to approach Debt Sustainability Analysis. What to look into more closely, what to do more work on etcetera,” the source said.

But contentious details, such as the speed at which debt levels higher than Pact limits should be reduced, could be avoided for now, though in that specific case the communique could still note general agreement that the current rule calling for 5% of the excess to be cut per year is too demanding.

Still, while the Commission remains publicly optimistic that finance ministers will achieve a broad consensus, others are less sure, given Germany’s continued and strong opposition.

“Maybe they had hoped [Olaf] Scholz or the Greens would soften the German position,” said one source, referring to the social-democratic German chancellor and his coalition partners.

GERMANY DOUBLING DOWN

Far from backing down, German Finance Minister Christian Lindner has doubled down on objections to bespoke debt plans and made clear in a written statement at the last finance ministers’ meeting that his views are shared across Germany’s coalition government.

One source following talks said compromise might be necessary.

Pointing to another German objection -- replacing the structural deficit as a fiscal target with a net expenditure benchmark as proposed by the Commission last November--, he said maybe Berlin could simply continue to use the structural deficit in its internal calculations, while Brussels monitors its own favoured indicator.

Others doubt that pragmatism will be enough, particularly given regional election defeats for Lindner’s free-market FDP party, which seem to have hardened still further his already hard line on fiscal rectitude.

The lack of clarity over the future of the fiscal rules raises questions over the basis for the Commission’s upcoming 2024 policy advice. One possibility would be for it to issue undetailed Country Specific Recommendations, which could be updated by early summer if reforms begin to take shape, officials said.