MNI: Commission Favours More Time To Cut Debt- EU Officials

European Union officials say they are close to a compromise among member states over reform of the bloc’s fiscal rules, which would incentivise strategic investments in green and digital transition and allow more time for countries to reduce their debts to accepted levels, while at the same time making enforcement stricter and more automatic.

An Orientation Paper on Fiscal Rules reform set to be released by the European Commission on Oct 26, will largely echo a Spanish-Dutch proposal published in April, they said. The Commission is likely to suggest replacing the current 1/20 rule for high-debt states, which obliges them to reduce excess debt over the maximum permitted 60% of GDP by 5% each year, with customised plans which could significantly extend the timeframe for such reductions.

The paper will outline how states could be incentivised to commit to key EU strategic investment priorities by being allowed a longer deadline for reduction of that part of their debt which finances the new investment. In exchange for such flexibility, the plans, once endorsed by the Commission and member states, would be binding. Activation of Excessive Deficit Procedures against offending states would also likely become more transparent and automatic.

LOWER PENALTIES

At the same time, financial sanctions which underpinned the current Stability and Growth Pact would be significantly reduced. This would make them easier to apply, officials said.

The Commission’s paper will contain options for reform and, while not presenting actual legislative proposals, will give a strong sense of the direction of reform. It will recommend that key limits suh as the maximum 60% debt-to-GDP ratio remain. (See MNI: EU Steers Away From Big Changes To Debt Rules).

A remaining difficulty in talks is Germany’s insistence on retaining its constitutional debt brake, which limits federal budget deficits to a structural deficit of 0.35% of GDP. Most other EU countries prefer a net spending benchmark, keeping public expenditure in line with changes in potential growth, with officials noting that the experience of recent years has pointed up the failings of targeting a structural deficit based on an unobservable output gap.

Nevertheless, it should be possible to accommodate Germany’s debt brake within the new framework via some kind of “technical translation” which would avoid tensions with the German Constitutional Court, officials said.