MNI:Fresh Italian Demands Make EU Fiscal Deal Harder-Officials

While the European Union’s Spanish presidency remains optimistic of a compromise over new fiscal rules for the bloc at the Oct 17 ECOFIN meeting of finance ministers, officials in Brussels told MNI the talks remain stuck with some adding that increasingly strident demands by Italy will make securing a deal still harder.

In recent days, the Spanish presidency has circulated a note setting out remaining issues as a way of focusing minds, while bigger country finance ministers had a call last week to try to plot a way forward.

But with Italy still pushing for spending on green and digital investment to be excluded from budget calculations and so-called “frugal” countries led by Germany insisting that a new-look Stability and Growth Pact set out strict debt-reduction programmes of at least 1% of GDP a year for governments falling foul of fiscal limits, the breakthrough needed to secure a deal this month remains a distant prospect. Finance ministry sherpas will meet on Oct 5 this week but the next ECOFIN meeting on Nov 9 may now be a more realistic ambition, some officials said. (See MNI:New Impetus But No Substantive Progress In EU Fiscal Talks)

COMMISSION PROPOSAL

“The paper was just a watered-down version of the Commission proposals,” one EU national source said, referring to the drive by Brussels for it to be allowed greater leeway in designing debt-reduction programmes and to move away from what it perceives to have been the unrealistically rigid strictures of the existing Stability and Growth Pact. The old rules are due to come back into force in the new year, after having been suspended due to the economic impacts of the Covid pandemic and the Ukraine war, and even a last-minute deal now could not bring a new regime into place before the second half of 2024.

While some countries which want exemptions for investment, like France, have been won over by a Commission proposal for debt-reduction programmes to be spread over seven rather than four years in return for productivity-enhancing reforms, Italy is still pushing for what it calls “temporary deviations” from debt limits. Recently it has also asked for its expensive “Super Bonus 110%” construction subsidy programme to be included in these, in a move which officials said has made it more difficult to broker a deal. (See MNI: Italy Makes EU Fiscal Rules Push As Deficit Nerves Grow)

One source noted that the new Italian demands are not only aimed at the future rules but also at the draft 2024 budget which will be vetted by the Commission later this month under the existing Stability and Growth Pact.

GERMANY SEEN INFLEXIBLE

Meanwhile the Spanish presidency is looking for a compromise under which the 1% annual reduction in excess debt demanded by Germany can be averaged out over a number of years, in order to address criticism that such an obligation would be damagingly pro-cyclical. But officials said they doubted German Finance Minister Christian Lindner will be flexible on a point he deems to be an essentially minimum effort.

Next week’s G20 meeting in Marrakesh will provide opportunities for EU finance ministers to hold bilateral talks while the Euro Summit on Oct 27 will allow leaders to give a high-level political push to talks, officials noted.

Mounting financial market pressures will also be used by some as a compelling reason to reach agreement on a fiscal regime, but could also provide ammunition to fiscal hawks like Lindner arguing that exemptions will not succeed in hiding debt.