MNI:EU In Fiscal Reform Race Before Old Rules Return-Officials

European Union member states face a race for agreement over a new legislative draft for reforming the bloc’s fiscal rules before old debt limits come back into force next year, though the European Commission has gone some way to meeting objections from countries like Germany, national officials told MNI.

The legislative draft released on Wednesday significantly toughened up the Commission’s original proposals made late last year following German criticism, officials said. It includes an automatic 0.5-percentage-point deficit reduction when states exceed the 3%-of-GDP deficit limit, prohibits backloading of debt reduction, and any deviation from the approved path for spending growth will trigger an excessive deficit procedure.

But there is no guarantee of securing member states’ final backing and then European Parliament approval before the old Stability and Growth Pact rules, currently suspended as governments cope with the economic aftereffects of Covid and the Russian invasion of Ukraine, are due to come back into force next year.

The Commission proposal came too late to be discussed at a meeting of EU finance ministers in Stockholm at the weekend and EU officials have made clear that the first ministerial-level discussion will only come in mid-June. Agreement at the level of states will take until the end of this year, officials said, leaving the usual protracted negotiations with the Parliament to early 2024.

Later this year, Spain, which takes over the EU’s rotating presidency in the second half, will be distracted by national elections, while elections for the European Parliament next spring will be an additional complication.

NOT TECHNICALLY COMPLEX

But the current Swedish EU Presidency is keen to get a deal across the finishing line, and is already coordinating with Spain, officials said.

“I am still hopeful we will find a consensus in time,” one official said. “The technical complexity is quite limited, so half a year should be quite sufficient in length.”

A first taste of member state opinions will come when ECOFIN sherpas meet next Thursday.

One frugal state source said his country would continue to back Germany if it pushes for stricter limits, but admitted there was room for compromise and that the new proposal had its advantages if it meant debt rules would actually be followed.

“We are a bit fatalistic about the entire issue, because the Commission doesn’t want to apply the existing pact anyway, so it doesn’t make much difference if we have new laxer rules. It just doesn’t matter anymore,” the source said. “We would prefer the old pact if enforced.”

Reservations are also likely among southern states. Italy, for one, lobbied unsuccessfully for investment in green and digital transitions to be excluded from debt calculations.

GERMANY THE KEY

But a Spanish source told MNI the proposal was “not bad” and should be received positively by member states during Madrid’s second-half presidency. The draft contains key elements of a Dutch-Spanish proposal from April 2022, which emphasised growth-enhancing investments and reforms as well as consultation over debt-reduction plans, the source noted.

But the Spanish official said it remained unclear whether the Commission proposal would really ensure states do not backload debt-reduction efforts. Details still need to be thrashed out, he indicated.

“We have to assess whether the Commission’s proposal guarantees the direction agreed by ECOFIN, of building fiscal buffers without damaging future challenges. These will be the essential point in the future negotiation,” he added.

In the past, Spanish officials have been pessimistic over the chances of approving changes to the Stability and Growth Pact this year. (See MNI: EU Fiscal Rules Reform Unlikely During Spanish Presidency)

The crucial question remains the attitude of German Finance Minister Christian Lindner. While the draft goes some way towards easing his concerns, it retains Commission-led Debt Sustainability Analyses and grants the Commission significant discretion in talks with indebted states.

“I think Lindner doesn’t really have an incentive to agree anything that sounds even vaguely like a weakening of existing pact,” the frugal source said, noting Lindner’s weak domestic political position. “In the logic of German coalition politics it just doesn’t make sense.”