MNI POLICY: EU Likely To Ease Debt Reduction Rules

The European Commission is likely to be forced to reconsider its stance that states facing excessive deficit procedures like France and Italy must reduce borrowing to a point where debt is on a plausibly declining path by 2032, MNI understands.

Upon the introduction of new fiscal rules earlier this year, the Commission had insisted that any divergence between EDPs, its traditional corrective arm, and the incoming arrangements would err in favour of the tougher requirement. But finance ministers from states involved are set in the next few weeks to make what could be a successful push to stick with the less ambitious adjustment required under the EDPs, which call for a 0.5% of GDP annual adjustment.

The EDP has continued in operation thanks to the insistence by Germany on its central role during tough negotiations on overhauling the fiscal rules, and MNI understands that the process of fully aligning it with the new corrective and preventative arms could take one or two years, MNI understands. (See MNI: EU Expects France To Request 7-Year Fiscal Plan-Officials)

GIVING FRANCE A HAND

One way to dodge the tougher requirements would be to take advantage of the facility under the new Debt Sustainability Analysis rules which allows countries to use their own assumptions, rather than the Commission’s, of key economic variables. The EDP adjustment could also be softened by a more generous assessment by the Commission of the likely impact of measures such as spending cuts or tax hikes.

Around 18 countries are expected to present debt plans and 2025 draft budget proposals to the Commission by the middle of this month. France is only likely to present its plan by the end of October, though its 2025 DBP should be in by the Oct 15 deadline.

While it will not want to undermine the credibility of its new regime, the Commission will be keen to avoid doing anything which risks pushing France over a cliff. It could also apply the rules’ general flexibility clauses, citing “relevant factors” and “objective circumstances”.