MNI: EU Fiscal Reform Faces Tough Opposition-Officials

The European Commission’s uphill task in driving through its preferred reforms of the European Union’s fiscal rules has been made even tougher by the bloc’s new Swedish presidency, which sympathises with other member states opposing the proposals and has left the issue off the agenda for next week’s finance ministers’ meeting, EU officials told MNI.

The lack of discussion next week of reforming the rules contained in the EU’s Stability and Growth Pact rules means progress on the matter is unlikely at the economy-focussed Feb. 9-10 EU summit, at which the subject had been expected to figure prominently, one official said.

“I think there is a lot of pushback right now from member states and the Swedish presidency is absolutely not eager to discuss this issue or consider it a matter of urgency at all,” another said.

The Commission’s Nov 9 proposals called for a more bespoke and differentiated approach to debt reduction, a focus on net spending limits rather than unobservable indicators, such as the structural fiscal balance, and greater emphasis on reducing debt by stimulating growth via investments and reforms, which was welcomed by higher-debt states.

But they have been criticised by German Finance Minister Christian Lindner, as well as finance ministers from the more frugal states, who favour a more uniform approach to consolidation and common criteria to assess states’ debt consolidation efforts. They are also unsettled by what they see as an effort by the Commission to carve out a bigger fiscal role for itself.

Leading economists from the cabinet of Economy Commissioner Paolo Gentiloni have now hit back at the criticisms made by member states in an article published in VoxEU, urging swift action to agree on and legislate the new rules.

STALEMATE

But even within the Commission there is opposition to its own proposals, with Executive Vice President Valdis Dombrovskis preferring more of a more finetuning of the existing regime, officials noted.

Germany and other like-minded member states would be happy if talks over the reform led nowhere, they said, as this could prompt a return to the previous limits on debt and borrowing once the Escape Clause waivers imposed during the pandemic and in response to the Ukraine war expire at the end of the year. (MNI: EU Stalemate Raises Prospect Old Fiscal Rules Will Return)

While more dovish countries such as Italy might be tempted to argue for the waiver to continue until agreement is finally reached, the lack of a proper borrowing framework could be seen as a risk by markets, they noted.

“This is why the Germans are playing the game they are, ‘let’s not discuss this and go back to the old framework, or have as minimal a reform as possible,” another source said, adding that only a “few cosmetic changes” would be the most likely outcome at the end of the day.

“How much pressure the leaders put on solving this issue and how fast is going to be the key factor,” one official said. “One thing’s for sure, the Swedes won’t move until they are absolutely forced to and the Spanish presidency – which would love to work on this – comes too late [in H2 2023] to make a meaningful contribution.”