MNI:Frugal Fury At EU Guidance Endangers Pact Reform-Officials

A backlash from Germany, and other “frugal” countries after the European Commission applied its preferences for a new set of fiscal rules to guidance for member states’ 2024 budgets could mean an already tight window for agreeing on reform has become even narrower, officials in Brussels told MNI.

The angry reaction by Germany, together with Austria and the Netherlands, prompted changes to draft conclusions by finance ministers set to be approved by leaders later this week, to include clear acknowledgement that key elements of the Pact’s reform had still to be agreed, the officials said. Germany perceived this year’s fiscal guidance as incompatible with the old rules under the Stability and Growth Pact, which is currently suspended due to the economic impact of Covid and the war in Ukraine and whose reform has been the subject of protracted and difficult negotiations.

“It was of the Commission’s own doing, because we had agreed on the conclusions and the German representative had also agreed to them and then just a couple of days later, they come out with fiscal guidance for next year where basically some of the things not yet agreed in the Council seemed to be in there,” one official from a national finance ministry said. (See MNI: EU Agrees Compromise Way Forward On Fiscal Rules Reform)

“This was the straw that broke the camel’s back for (German Finance Minister Christian) Lindner.”

PRIOR ENGAGEMENT WITH BRUSSELS

The Commission set out its preferred reforms last November. These would keep the Pact’s existing major numeric limits such as a 60%-to-GDP cap on public debt, but would allow more flexibility in correcting any breaches and an enhanced discretionary role for Brussels. Germany and its allies want guarantees of minimum fiscal effort as well as stronger enforcement of rules if they are broken.

Germany will now insist on prior engagement with the Commission before it produces legislative proposals for the reforms, which Economy Commissioner Paolo Gentiloni and Commission Executive Vice President Valdis Dombrovskis want to take place by early April.

The Commission routinely consults with national capitals before EU legislation, but Germany could now seek more concrete concessions, officials said, with some saying the proposal could be pushed back into May. The first half of this year is a rough deadline for the legislative proposal, which needs to be finalised by year end, but given the controversy surrounding EU Economic Governance Reform, there is a danger more time could be needed.

Only once the legislative proposal is on the table do the toughest negotiations begin, said one official, adding “everything up to that point is basically a debating club.”

Another official said it would be an achievement just to get an agreement between national governments in the European Council, let alone get a proposal through the European Parliament.

“I would expect a long discussion. I am not sure we can conclude by the end of the year,” the official said, noting that if the proposal is ready by April that would leave only one informal and one formal finance ministers’ meeting before Sweden hands over the EU’s rotating presidency to Spain in July. Then the Spanish would oversee five ECOFINs in the remainder of the year, with the last early December.

ELECTORAL DEADLINE

With European Parliament elections due in May next year, September and October will be the effective cut-off point for submitting legislation, as political parties will want to avoid controversial issues during the campaign, parliamentarians told MNI.

But the national finance ministry source said the Commission should still be able to finesse key aspects of the implementation of new rules from the start of 2024 even if the deal has not been transposed into EU law.

“Not the entire system will be enshrined in secondary law and in fact the (existing) SGP is not all about secondary law,” the official said. “The Commission has issued a number of communications explaining how they interpret existing law. They can change that interpretation to move in that direction.”