MNI SOURCES: EC SGP Talks To Stress Existing Plan Flexibility

The EU Commission will Tuesday unveil its long-awaited consultation on the review of the fiscal rules, but sources tell MN the paper will avoid making clear proposals for reform of the stability and growth pact and instead try and frame the future debate around key questions.

The Commission will, however, acknowledge that the existing pact has already demonstrated flexibility during the Covid crisis, with the escape clause from the fiscal rules seen as a success.

EU sources also note a so-called 'Golden Rule', exempting green investments is also likely to be prominent in the Commission's list of issues for discussion, with one official accepting that "politically, they need to promote the idea of green in the public finances and the green transition."

QUESTIONS, NOT ANSWERS

According to an Italian Finance Ministry source, who has seen an early draft of the Commission's consultation, the document will set out 11 questions on the future of the EU's fiscal regime and stress that that the Covid-19 crisis would have proved much worse if it had not been for the activation of the escape clause.

The source said that the draft would reflect the general agreement that there is a need to simplify the rules, as well as to be more focused on hard data rather than on estimates of the output gap. The Commission's use of cyclically adjusted budget and debt positions, based on estimates of the output gap, have been much criticized by high-debt states, like Italy, in the past.

The existing flexibility of the rules could be used as an open door for the future exploitation of the existing flexibilities in the current rules, the Italian source said, without the need for formal unanimous agreement or for changing the European treaties, thus allowing for a speedier reform process.

BALANCED APPROACH

According to one EU source, there will be a need for the consultation to be balanced between fiscal doves and hawks, acknowledging the downside risks, but recognizing the strength of the recovery and inflationary pressures.

"You have two objectives, the need to recover and prepare for future, and, on the other hand, higher debt ratios and less confidence about 'low for long', and these two targets work in different directions," an EU official said, noting that a sensible balance could end in no change in the rules.

Actual proposals for reform are expected to be delayed until mid-2022, after the French presidential election. Agreement among EU states is expected before the end of next year, enabling any new approach to come into force before the current escape clause from the Stability Pact expires in December 2022.

The consultation is expected to be followed by a series of intensive discussions, first involving finance and economic officials from EU member states, and then among finance ministers at the November Eurogroup and ECOFIN meetings.