MNI SOURCES: EC To Set Out SGP Reform Ideas As Split Lingers

Brussels remains divided over the direction reform of fiscal rules should take with Paulo Gentiloni, EU Commissioner for the Economy, likely to lay out his ideas for the long-term future of the Stability and Growth Pact in coming weeks, with a view to relaunching the consultation process in the spring, sources tell MNI.

Underlining divisions within the Commission, sources say Gentiloni will argue that higher levels of public debt built up by some countries during the Covid crisis are sustainable in the current low-rate environment.

However, fiscal traditionalists, like Commission Vice President Valdis Dombrovskis, favour streamlining the pact by introducing simpler and stronger rules and reducing the complexity in the current fiscal surveillance process, which some blame for letting high-debt states, like Italy, off the hook in recent years

"The Commission still don't know what to do," a source with knowledge of the discussion said.

"There are the traditionalists, those fiscal conservatives who are pushing for reining debt in as soon as possible, but that poses clear dangers. Others, like Gentiloni, argue that debt servicing is so cheap that much higher debt levels are now sustainable," the source added.

"It's clear that we can't sustain high levels of debt for ever, but the mistake of tightening too soon following the financial crisis is a lesson which has been learned by policymakers," the same source noted.

COUNTRY SPECIFIC

Another EU source said that the two commissioners will need to resolve their long-running differences on these issues by the second quarter of this year so that the Commission's annual economic policy advice to member states – the 'Country Specific Recommendations' – can provide input into the 2022 national budget drafting process.

"We do need a common understanding," the source said.

But the Commission will also need the support of member states for its proposals, which may not just be a rubber stamp.

"The Eurogroup President (Irish Finance Minister Pascal Donohoe) wants to have quite an active role in shaping this debate," another source added.

That discussion will also provide an opportunity for fiscally hawkish states, such as The Netherlands, Austria and some of the Nordic states, to push for stricter enforcement of the SGP in future and potentially spark a row with higher debt states in the south.

Agreement will be needed by mid-year, sources agree, with finance ministers now in general agreement that the current suspension of the fiscal rules, which followed the outbreak of the Covid-19 pandemic cannot be sustained into 2022.