MNI:New Impetus But No Substantive Progress In EU Fiscal Talks

Talks on reforming the European Union fiscal rules have been given fresh “political energy” by the weekend’s meeting of EU finance ministers in Spain, though there is still no clear progress on key sticking points, officials in Brussels told MNI.

Spain, holder of the EU’s rotating presidency, is hopeful of an outline deal as soon as the Oct. 17 ECOFIN meeting of finance ministers ahead of political agreement by the end of the year, with 70% of the legal text of a deal on reforming the Stability and Growth Pact already agreed, a Spanish source said. Italian Finance Minister Giancarlo Giorgetti said on Tuesday that he was confident of a deal before Christmas.

“The technical work is done, and the remaining part is mainly political. That’s why we could get an agreement in the next meeting even if more meetings would be needed for concrete elements,” the Spanish source added.

States such as Italy are eager for a deal before the old fiscal rules, currently suspended due to Covid and to mitigate the economic impact of the Russian invasion of Ukraine, are due to come back into force in the new year. However, significant differences remain, with Germany demanding so-called “safeguards” in order to guarantee countries return towards borrowing limits while Italy and France want investment in the green and digital transitions to be exempt from fiscal limits. (See MNI: Push For New EU Fiscal Regime Before Old Rules Return)

GENTILONI OPTIMISTIC

“There is more political energy in the process, yes. However, I would not say that the positions of the major players have changed,” another source close to the talks said. “There is however recognition by most that an agreement is important and (an) expression of willingness to work constructively.”

European Economy Commissioner Paolo Gentiloni talked at the weekend of “a willingness” to intensify efforts and to adopt “an approach that is oriented towards compromise”. Officials from so-called “frugal” northern states poured cold water on that idea this week, though an Italian official said Rome had taken heart from what it saw as Germany’s lack of objection at the finance ministers’ meeting in Santiago de Compostela to its usual calls for exemptions for green and digital investments.

“It seems that a window has opened to exclude some green and digital investments out of deficit like us and France have been asking for. There is margin for negotiation,” one Italian source said, noting however that this was limited. “Germany wasn’t against this idea this time, but the exclusion will be very limited in terms of the number of investments that can benefit from this and the quantity.”

But if such a window has indeed opened, no-one seems to have told Germany or the frugal states. Officials in this bloc also rejected ideas of a legal “framework” agreement, insisting that nothing can be agreed before all is agreed.

“The presidency and the Commission said we should send optimistic messages. I suppose this is what they are doing. I still don't see how this is going to work,” one frugal finance official said, noting that while the Spanish intend to put a compromise proposal on the table in technical work ahead of October’s ECOFIN, that this will not guarantee agreement.

MORE TRANSPARENCY

Germany’s call for a 1% of GDP annual reduction of excess debt during offending states’ four-to-seven-year consolidation programmes could potentially be agreed by all, but concessions on investment exemptions for Italy and France look more problematic. (See MNI INTERVIEW: Tough Talks Ahead To Carve Out EU Fiscal Deal)

“Deficits are deficits, I don’t think Germany will buy this idea of exemptions,” a source present at the talks said. “What happens when the ratings agencies take a different view of what your debt or deficit is and downgrade accordingly?”

One area, however, where the Spanish presidency does appear to have made progress is on the need to make the Commission’s proposed debt sustainability analysis more transparent.

“In theory, it should be possible to set out in a legal text in such a clear way that all states can replicate the calculations,” one source said, “Maybe on that, I think, they have some progress.”