MNI: EU Stalemate Raises Prospect Old Fiscal Rules Will Return

Talks on reforming the European Union’s rules on public borrowing and debt are in stalemate, raising the prospect of a temporary return to the old Stability and Growth Pact in 2024, EU officials told MNI.

German Finance Minister Christian Lindner has been “extremely critical” of a European Commission Orientation Paper which had been meant to pave the way towards a joint legislative proposal on reform but which Berlin sees as too lenient with high-debt countries, officials said.

“The finance ministers were still very far apart,” one official said, speaking after a recent meeting. Another official said: “Lindner objected to a number of things in the [Commission] paper, and then he left the meeting.”

The Commission proposal would give states more say in debt-reduction plans, as well as more time and flexibility to reduce high debt. It also suggested that the Commission itself have wide discretion in enforcing the new rules, prompting “frugal” states like Germany to worry that enforcement would not be as automatic as they had hoped. (See MNI: EU Fiscal Reform Proposal Seen As Lax By Hawks-Officials)

NO SIGN OF DEAL

There is no sign of a deal on a legislative proposal, officials said.

“Whatever the Commission had expected, the ambition now will be much less than that,” said another official.

Key to this failure to secure agreement has been the absence of a joint Franco-German position on the issue. Efforts to draft a joint Franco-German “non-paper” failed some months ago, officials said.

One source blamed the difficult internal dynamics of Germany’s governing coalition, which groups the centre-left SPD with the Greens and Lindner’s pro-free-market FDP.

“They have had their internal policy battles and the SPD and Greens have had some notable victories, I think fiscal rules is one area where Lindner’s FDP really has to take a tough line,” the source said.

While the Commission has the right to make its own legislative proposal, without any agreement among states there is a high chance that this would get bogged down in the Council.

EFFECTIVE MARCH DEADLINE

Any legislation will need at least nine months for approval from the European Parliament and Council, while member states will need guidance ahead of time on how to frame 2024 budgets. So, without a deal on the fiscal reform by March, there will be a growing likelihood that the old Stability and Growth Pact will come back into force the following year, once the Escape Clause suspension of the rules, enacted due to the Covid pandemic and the impact of the Ukraine war, expires.

“There are a few countries that would be very happy with that, that is why they are unwilling to compromise. On the other hand, it’s out of the question for some states to go back to the old rules,” said one official, adding that while there is little prospect of another extension of the Escape Clause, some transitional arrangement could be made to soften any reimposition of the old SGP.

A sense of the broad direction of a likely future reform of the fiscal rules would for example allow the old rules to be interpreted in the spirit of their upcoming replacements, officials said. But the more deadlock persists, the greater the likelihood that the Commission will simply exercise more discretion in overseeing the Pact, they noted, adding that this prospect might focus the minds of some finance ministers on seeking a deal for its reform.