MNI: Chances Rising Of Return To EU's Old Fiscal Rules IN 2024

The fallout from Spain’s inconclusive July general election looks set to further reduce the chances a deal on overhauling the European Union’s fiscal rules this year, making a return to the old Stability and Growth Pact debt limits in 2024 more likely, officials in Brussels and Madrid told MNI.

Preelection pledges from officials in Spain, which holds the EU’s rotating presidency, that work on securing agreement over new rules on borrowing within the bloc, at least at the technical level, would continue through Brussels’ traditional August break - seem to have fallen by the wayside. EU officials taking part in the talks held their last meeting on July 24 and said they will not resume until late August or early September.

While a Spanish finance ministry source insisted that a fiscal reform deal is still possible close to year-end or in early 2024, he conceded that Madrid’s political drive will inevitably diminish after last month’s inconclusive elections. Failure to strike a deal soon makes it more likely that the old Stability and Growth Pact rules, currently suspended due to the economic impacts of Covid and the war in Ukraine, will come back into force on schedule next year, guiding EU fiscal policies through 2024.

STALEMATE

Still, so far Madrid’s political uncertainty has had little impact on the fiscal talks, which remain stuck at the same point they were before Spain started its six-month EU presidency, the Spanish finance ministry source said.

“Focusing on the Spanish presidency is a distraction as it is hard to see how the chances of getting a deal or not will depend on our work,” the Spanish source said, adding that Spain’s technical teams will remain the same, “which is a positive.”

Negotiations have for a while been confined to an exchange of clarifications as Germany and its Finance Minister Christian Lindner argue against European Commission proposal for more flexible arrangements for reducing excess debt and for more room for discretion by Brussels. While the Commission has made a concession to Berlin, agreeing to automatic reductions of 0.5% of GDP in net expenditure for countries exceeding their limits, Germany is insisting on a commitment to more aggressive debt reductions.

Germany claims 10 other EU governments share its position, but Commission officials said that that does not amount to specific backing for Lindner’s more radical proposals, such as the 1.0% of GDP debt cuts for highly-indebted states. Some of the so-called “frugal” nations now concede that the old fiscal framework was too rigid to be enforceable given political realities, according to some officials. (See MNI:Frugals Open To EU Debt Compromise, Spanish Presidency Key)

Germany’s long-time ally the Netherlands has indicated that its views are now closer to the Commission’s proposal than the one set out by Lindner, the Spanish source noted. While the Netherlands’ position is like Spain’s complicated by upcoming elections, Finland and Sweden have also moved closer to the Commission.

DEAL DIFFICULT NEXT YEAR TOO

Still, one EU source said the gap between Lindner and the Commission and its supporters is now so wide that to bridge it may require an agreement between French and German heads of government. There is so far little sign of any such Franco-German rapprochement.

The prospects for a deal in the Belgian EU presidency, which follows Spain’s, would be dim, with campaigning for elections set to shut down the European Parliament from next spring. That would mean leftover legislative work to finalise any deal could not start until the autumn of 2024 during what is likely to be a controversial and difficult Hungarian presidency of the EU.

Finance ministers are unlikely to get down to serious political-level negotiations on the fiscal reform until the Oct 17 ECOFIN meeting, leaving just two more monthly meetings after that to get a deal done before year end.