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Fed Edging Closer To Tapering

MNI (Brussels)

A proposed overhaul of the eurozone's strict limits on public debt is likely to lead to few changes, with fiscal hawks within the European Commission strongly resisting any loosening of the rules to allow governments to spend more, EU officials said.

While EU Economic Affairs Commissioner Paolo Gentiloni pushed once again for ambitious reform of the Stability and Growth Pact in a keynote speech last week to an internal Commission workshop, soundings of EU officials close to the discussion suggest that the gap between his views and those of prominent fiscal traditionalists, such as EU Commission Vice President Valdis Dombrovskis, remains unbridged.

"The compromise will be that the rules change marginally," one EU source suggested.

FRUGAL OPPOSITION

Officials also noted that opposition to more radical changes to the guidelines is also likely to come from the more fiscally hawkish EU member states, such as the so-called "frugal" countries grouping Austria, Denmark, Netherlands, Sweden and sometimes Finland, which opposed the EU's Recovery and Resilience Fund aimed at powering recovery from the Covid-19 pandemic.

Gentiloni wants the rules changed to make investment spending easier, but such is the strength of opposition to some of his ideas that some officials speculate that the currently active 'escape clause' from the Stability Pact, which was triggered by the Commission following the onset of the Covid crisis, may end up being deactivated without reformed rules being in place. This is something the Italian Commissioner wants to avoid.

Recent thinking has been that the escape clause would remain in place until the end of this year but that the SGP would be reactivated in 2022, but given the prevailing consensus on the need to avoid austerity, it is recognised that even a return to the current pact will have to be tempered with flexible interpretation.

FISCAL STANCE

"It's possible that the escape clause gets deactivated before new rules are legislated," another source said, "and then the flexibility in the current rules would have to be exploited in the interim."

Discussions on reform of the pact will intensify over the course of 2021, but no concrete milestones are yet in place.

Eurogroup finance ministers are due to decide on the fiscal stance for 2022 by the summer of this year and a discussion among member states on medium-term fiscal strategy would follow in subsequent months.

An EU official said that the plan remained for the Commission to launch a consultation exercise on pact reform later this year.