MNI: Inflation Strengthens Hawks' Resolve In EU Debt Talks

High inflation and additional government spending to help consumers and business cope with higher prices are strengthening the resolve of more fiscally conservative European Union states to resist any further extension of the waiver on the bloc’s borrowing limits and to press for a prompt resumption of talks to reform the rules, officials told MNI.

While officials cannot rule out the possibility that the so-called Escape Clause from the Stability and Growth Pact’s borrowing rules, first enacted to help member states cope with the Covid pandemic and now due to run until next year, will be extended once again by the European Commission in response to soaring energy prices, they insisted that this is very unlikely.

“From what we are hearing, the Commission has decided that you can no longer postpone because of uncertainty, because we have been operating in an uncertain environment for the past three years and it seems like it will stay there for months or even years,” one source said.

Talks on reforming the Stability and Growth Pact, pushed back as governments responded to the Russian invasion of Ukraine, can be delayed no longer, fiscal hawks insist, with the loosening of borrowing limits initially hoped for by some southern European states now superseded by what is likely to be a light-touch reform focussing on interpretative changes. (See MNI: Gas Shortages To Delay EU Fiscal Rules Overhaul-Officials)

Germany’s recently-published position paper on fiscal rules reform, involving no amendments to current legislation, has set the scene for discussions between the Commission and EU states, officials said. The Commission is now preparing a “high-level orientation” on reform, which will be followed by a discussion among member states, hopefully leading to agreement and a Commission proposal for more concrete changes in the spring of 2023.

LIMITED REFORM

Key tenets of the pact including a 60% cap on public debt to GDP and a 3% of GDP limit on budget deficits are set to remain.

“The kind of ambition we are talking about is not great. No one questions the 60% or 3%, an official said.

While there is agreement that rules on the pace at which overly-indebted states can return to permitted levels need to be softened, calls by countries including France and Italy for exemptions from borrowing caps for priority investments to finance the green transition, higher defence spending and cope with immigration have been rejected, officials said.

High inflation makes the current situation very different from the Covid era when subdued rates of price increases and business lockdowns supported the case for broad fiscal support, officials said, noting that help for consumers and businesses hit by energy price hikes must be targeted and temporary.

“In view of what is going on right now, the aim is to go back to a normal economic policy framework and back to some rules that would frame the actions of governments,” the source added. “We have no reason to believe inflation will cease to be a problem in the coming months.”

One official said that the ECB’s new Transmission Protection Instrument, allowing it to shore up prices of sovereign bonds which come under market attack, could also strengthen the hand of the hawks in the reform talks, as otherwise there would be little incentive for states to pursue fiscal discipline.

“If we don’t go back to rules this time, we have to start questioning what is the purpose of them,” the official said.

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