MNI: Push For New EU Fiscal Regime Before Old Rules Return

European Union officials working under the Spanish presidency are making a last-ditch attempt to secure agreement on a reworked fiscal rule regime for the bloc by the end of the year and to head off the return of the existing rules which are currently suspended until the end of 2023, officials in Brussels told MNI.

While Germany is insisting on a minimum “safeguard” 1.0% reduction per year in debt/GDP ratios in excess of the guidelines, this has been dismissed as unsustainable by both high-debt states and the European Commission, and Spain is pushing in technical talks for a compromise under which the reduction could be averaged out over the full four to seven years of an EU debt consolidation programme.

But while Spain argues that this would enable states to continue in programmes during periods of lower economic growth and tax revenues, officials still doubted whether it would satisfy Germany. (See MNI: Chances Rising Of Return To EU's Old Fiscal Rules In 2024)

“The idea of a “safeguard” is that it is a required absolute minimum. If high-debt states are offered the option of not reducing their debts due to mitigating circumstances inn one year, can they then be relied on to do more than 1.0% in other years? The record is not great,” said a source connected to one of the so-called “frugal” group of countries which like Germany want tougher European rules on borrowing.

Another said he did not see German Finance Minister Christian Linder dropping his opposition easily.

“I don't see the political reason for Lindner to agree to anything like that. It would be like a defeat. He needs to get something in return, too. What would that be?”

OLD RULES SET TO RETURN

Former senior German Economy Ministry and IMF official Jeromin Zettelmeyer told MNI in a recent interview that a trade-off could be imagined between Germany and the higher-debt states, under which the former would get a commitment that states’ debts would be reduced by the end of the consolidation period and high-debt states would get a guarantee that the seven-year option would be made available. (See MNI INTERVIEW: Tough Talks Ahead To Carve Out EU Fiscal Deal)

Spanish officials have indicated that there will be little discussion of the rules impasse at this weekend’s informal meeting in Santiago, Spain, but that EU finance ministers will get down to serious negotiation at the October ECOFIN meeting.

“The Spanish presidency is working intensively and imaginatively to find a solution,” one senior EU official said.

Without agreement on a new fiscal regime, the old Stability and Growth Pact rules, currently suspended due to the impact of the Ukraine war, are due to come back into force in the new year, a prospect which is deeply worrying to countries facing budget constraints such as Italy. (See MNI: Italy To Raise 2023 Fiscal Deficit Target)