MNI: German Proposals A Basis For EU Debt Reform - Officials

Proposals for reform of the European Union’s fiscal rules published by the German government last week, which make concessions to the need to promote growth and investment, could form the basis for an eventual compromise for overhauling the Stability and Growth Pact, EU officials told MNI.

While countries like Spain and Italy, together with Economy Commissioner Paolo Gentiloni, an Italian, would like to see more sweeping reductions to the Pact’s strictures on debt, Germany’s recognition that the 1/20 rule, under which high-debt states must reduce any excess over 60% of GDP by 5% a year, is no longer realistic in light of much higher Covid borrowing levels, should find favour with the so-called fiscally “frugal” countries, one source said.

In an interview with Handelsblatt last week, German Finance Minister Christian Lindner also moved closer to the position made in a joint proposal in the spring by Spain and the traditionally hawkish Netherlands for more country-specific debt-reduction strategies, which would be more gradual and avoid harming economic growth. The 1/20 rule would “overwhelm” some countries, Lindner admitted.

France too may be willing to live with the German reform blueprint, one source said, noting that the country adopted a pragmatic stance on the issue during its January-June presidency of the EU.

“They know that huge changes are unlikely,” the source said, before adding that obviously he couldn’t be “100% sure”.

WINTER TRADE OFFS

One source from a hawkish country suggested that the proposals reflected nothing more than the long-standing German point of view, advocating a less discretionary interpretation of the fiscal rules and more binding enforcement, balanced with greater realism on the pace of debt reduction in high-debt states.

“They are ready to be a bit flexible on investment, but this has to be done within the existing investment clause,” the source said.

Under the investment clause, states are allowed to deviate from their medium-term budgetary objective if the investment is likely to enhance long-term growth to an extent equivalent to a major structural reform.

Some sources speculated that the solidarity shown by France ahead of a potential winter energy crisis, which has seen it backed Berlin on a key agreement over possible mandatory consumption cuts and indicate that it would help Germany should the latter face a total Russian gas shutdown, might set the scene for trade-offs in other policy areas, such as fiscal reform or maybe even an extension of joint EU borrowing. (See MNI: EU Likely To Seek Broader Deal On Gas Sharing-Officials)

The Commission has made clear that it does not want to propose anything in its concept paper on the Stability and Growth Pact due in late September that will not win sufficient backing from member states. The German proposals now represent the last major piece in the puzzle following those from southern and other countries, as well as a politically realistic starting point for the talks this autumn.

“I can imagine that the final result will look a lot like the German proposals, maybe supplemented by a role for debt sustainability analysis to determine the consolidation path for the higher-debt states,” one official said.