Free Trial

MNI INTERVIEW: Tough Talks Ahead To Carve Out EU Fiscal Deal

Zettelmeyer Says Debts Must Come Down; Sees ECB As Safety Valve

(MNI) Brussels
(MNI) Brussels

A landing zone in the EU’s fiscal rules negotiations is possible but tough talks lie ahead, says Jeromin Zettelmeyer, former top German economic policy official who is now director of the influential Brussels-based Bruegel think tank.

Fiscal policy across the EU will need to be shifted to a much tougher stance over the next four-to-five-year horizon and it will fall to “nimble” monetary policy to ease the economic fallout, Zettelmeyer told MNI in an interview. But to secure a deal, he acknowledged that high-debt states may need to be reassured that they will be able to take advantage of an option to smooth out their debt-reduction plans over seven years.

“Debts are too high, and they need to be brought down one way or another,” he says, relying on the ECB’s monetary policy as a safety valve. “In principle, the way it should work is that fiscal policy should be firmly on a contractionary path for the next 4-5 years and then it’s up to monetary policy to make sure this doesn’t get us into a big recession. Since they are now away from the famous lower bound on interest rates, they should be able to do that.”

Potential landing ground

Zettelmeyer says that the “safeguards” presented by the EU Commission in its April 23 legislative proposal could be tightened up so that member states commit to reducing the level of their public debt by the end of the proposed four-year to seven-year adjustment period. The current proposal requires that they only need to ensure that their debt is on a “plausibly and continuously” declining path by that point.

“Maybe the debt ratio (could be required to be) a percentage point lower or maybe two points lower,” a concession by the Commission that might ease German concerns that the current proposal is still too lax. But he concedes for high-debt states to commit to reduce debt by the end of the adjustment period would “not be trivial.”

In exchange, Zettelmeyer outlines that Germany could make a concession to high-debt member states by agreeing to remove an obstacle in the latest Commission proposal which would otherwise prevent them from taking up an option to extend their four-year adjustment period to seven where they need more time for public investments and structural reforms. This obstacle occurs in the Commission draft amendment to the current Excessive Deficit Procedure, where the notion of the ‘planning horizon’ rather than the ‘adjustment period’ is introduced.

Seven Year Itch

“There seems to be a consensus that the ‘planning horizon’ is four years even when the adjustment period is extended to seven years and that has a very strong implication,” Zettelmeyer explained. “If a country finds itself with a binding debt safeguard the three-year extension will not help it smooth its adjustment over seven years because it still needs to get to a lower or same debt ratio compared with that at the beginning of the period by year four. So, this is super tough.”

Making the debt safeguard a “bit more stringent” and a language “tweak” to allow high-debt states to benefit from the three-year extension option could provide the elements of a breakthrough to a “potential compromise”, he says. “To the extent that there is any compromise it will be in that space,” though he cautions that the forthcoming EU talks on the reform will “certainly not be easy” and “will take several months.”

EU finance ministers are aiming for an agreement by the end of this year so that a deal can be legislated before the end of the current EU institutional mandate and EU elections due in June 2024. The EC has said that they expect to apply the new rules at the start of 2025.

Zettelmeyer, a former Director-General for Economic Policy at the German Federal Economics Ministry and Deputy Director of the Strategy and Policy Review Department at the IMF, also urges Germany and other more fiscally prudent member states to seek assurance from the Commission that its Debt Sustainability Analysis methodology (DSA), which will anchor the new system, does not allow Brussels and politicians in high-debt states to engage in opaque bilateral deals on debt reduction.

MNI Brussels Bureau |
MNI Brussels Bureau |

To read the full story



MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.