MNI: EU To Fit Defence Boost Into Fiscal Framework-Sources

Plans to reform European Union rules on borrowing and debt could be pushed back months by the war in Ukraine, which is monopolising official attention, EU officials told MNI, adding that ways will also be sought to permit an expected big increase in defence spending.

While the Commission has committed to publishing a proposal on reform of rules contained in the Stability and Growth Pact in July and to have a new regime in place before 2023, these dates could see slippage, they said.

“We aren’t talking about anything else apart from Ukraine,” said one source “This is something that can be delayed, and delayed again.”

The Commission’s reform proposal could be pushed back to autumn, another official said.

Ways are also likely to be found to permit greater spending on defence following Germany’s watershed decision to ramp up its military budget, sources said, though they added that hawkish states would not wish it to be included in investment spending, which is exempt from the rules.

PACT WAIVER

The current waiver on Stability and Growth Pact rules due to the Covid pandemic, which was due to be removed, is now likely to be extended, following the Commission’s decision to look again at the matter following its Spring Economic Forecast in May, some sources said. Others disagreed, though they noted that it would make little difference given the forbearance likely to be shown by the Commission next year.

“Current market expectations – one percent off growth and 5-6% inflation – that would not necessarily be enough (to keep the Pact in abeyance),” one source said.

While early hopes by some countries for changes to the Pact’s limits on annual budget deficits and total debt of 3% and 60% of gross domestic producthave now faded, officials are still looking to ensure that Covid borrowing is paid back only in a gradual and sustainable way.

FISCAL TOLERANCE

Even fiscal hawks, like Commission Executive Vice President Valdis Dombrovskis, have signalled that it is unlikely the bloc will ever insist on the never-enforced stricture calling for 5% of excess debt to be reduced each year. It was also significant that the Commission used the phrase ‘multi-year’ when it addressed debt reduction in its 2023 fiscal guidance published Wednesday, one official noted.

Few now expect much progress to be made at either the French EU Presidency’s summit next week in Versailles to discuss the new European Growth Model and Strategic Autonomy, or even at the March 24-25 Euro Summit in Brussels.

“I wouldn’t expect a breakthrough, we weren’t in fact expecting a breakthrough before anyway,” one of the sources said.