MNI:Higher Yields Making EU Fiscal Rules Deal Harder-Officials

Rising bond yields have entrenched differences between European Union member states over new fiscal rules for the bloc rather than adding to urgency for a deal, officials told MNI, with some adding that chances are rising that talks will fail to reach agreement this year.

Spain, holder of the EU’s rotating presidency for the rest of 2023, is set to sound out finance ministers at an Oct 17 meeting before what could be a final push to clinch a deal at the Nov 9 ECOFIN. While there is also an ECOFIN in December, any delay beyond early 2024 in clinching a deal would mean that scope for its approval would be pushed back until after European parliamentary elections in June, officials said.

But a meeting of senior EU finance officials earlier this week made little progress on narrowing the gulf between so-called “frugal” countries such as Germany, which wants a reformed Stability and Growth Pact to insist on minimum 1% of GDP annual debt reductions by countries in excess of limits, and others such as Italy and France which are calling for green and digital investments to be excluded from borrowing metrics, the sources said.

CALLS FOR URGENCY

The optimism expressed by Spanish officials and Economy Commissioner Paolo Gentiloni in recent weeks and reminders by others that a clear fiscal framework for the bloc is becoming more important as bond yields and volatility rise seem to have had little effect in bringing a deal any closer, with Italy instead adding to its demands by calling for more exemptions from debt calculations. (See MNI: Italy Makes EU Fiscal Rules Push As Deficit Nerves Grow)

“Germany and the frugals stress emerging credit risk as the main driver in bond markets, while Italy and Spain say, well the markets expect laxer fiscal rules anyway,” said one participant at the talks. (See MNI INTERVIEW: Bond Sell-Off Makes EU Fiscal Deal Crucial-Buti)

Bilateral meetings between big four EU finance ministers on the margin of the IMF-World Bank meetings in Marrakesh this week also made little difference.

While one source close to frugal positions accused the Spanish presidency of pursuing its “own agenda”, Italian and Spanish sources insisted a deal is still more likely than not.

“We are still thinking to get a deal as consequences of not doing so are big for everyone,” a Spanish official.

EXCESSIVE DEFICIT PROCEDURES

With old Stability and Growth Pact rules, currently suspended due to the impacts of Covid and the war in Ukraine, due to come back into force in the new year, potentially triggering Excessive Deficit Procedures against Italy and France, Rome has also launched a new push for 2024 to be declared “transitional”, which would allow it to avoid being sanctioned.

While Spain regards the Italian request as separate from the main talks on fiscal reform, Germany and the frugals insist that legally the current rules must be enforced until new strictures enter into force, officials said. The European Commission, meanwhile, is still hoping for a deal this year, which it says would allow it to interpret the existing rules flexibly in the light of the new ones which would replace them.

An Italian official insisted that Rome’s calls for a transitional period were in line with the Commission’s thinking, and that a deal in November remains the most likely outcome.

“We need to make progress on this as returning to the old rules for a short time does not make sense,” the official said, adding that this would also make it easier for Italy’s parliament to enact its long-overdue ratification of changes to the treaty governing the European Stability Mechanism.

A Spanish official told MNI that while low-level technical talks have made progress, the political drive required for a deal has been lacking.

“Momentum has been lost somewhere but we want to get it back as we are fully committed to getting this out in our term,” the official said.