MNI SOURCES: Higher Chance EU Debt Rules Significantly Eased

A European Commission signal that it will continue to go easy on high-debt states through at least 2023 gives more time for a major overhaul of the European Union's Stability and Growth Pact and raises the chances that national borrowing limit rules will be significantly loosened, officials told MNI.

While officials now say it is unlikely a deal to overhaul the SGP will be ready once its suspension due to the Covid-19 emergency expires at the end of 2022, a key phrase in the Commission's annual economic policy advice to states released last week indicates continued significant leeway for struggling economies the following year. This will grant more time to negotiate ambitious changes to the SGP rules, which fix maximum EU member states' permitted borrowing at 60% of GDP and stipulate the speed at which debt overshoots should be reduced.

Consultations are due to start on SGP reform in the autumn, with most EU officials – outside the more hawkish states – arguing that a much looser SGP will be required to accommodate a post-crisis reality of higher public debt and deficits. Any new rules are likely to allow slower paces of debt reduction and put a higher priority on productivity-enhancing investment, officials said.

FISCAL CLIFF EDGE

"My feeling is that the only way we will finalise the review of the fiscal framework in time to be effective from 2023 is if we agree to something very similar to what we have right now," says one senior EU source. "Significant changes to the framework will be much more complicated and will take a lot more time. That will not be possible by 2023."

The Stability Pact's General Escape Clause, activated in order to allow countries to raise borrowing during the Covid-19 pandemic, only applies until the end of next year. But after that the Commission has now indicated it will continue to take a forgiving attitude to borrowing, with its policy advice stating that "country-specific situations will continue to be taken into account."

This phrase was meant to ensure that Italy in particular did not face a fiscal cliff edge, officials said, noting that fiscal outcomes will still be so bad in 2023 that no rulebook could accommodate them. Having to take more time to permanently loosen debt rules is less important than ensuring that agreement is reached, they said.

"I don't think it matters very much, so long as there is some degree of consensus on the direction of the change," one source said.