MNI: EU Debt Pact Review To Resume After German Elections

The European Commission will move quickly to relaunch its review of the bloc's rules on debt and borrowing once the German elections are out of the way, but negotiations will last until the end of 2022 at the earliest, officials told MNI.

While the outcome of Germany's vote on Sept. 26 is key, French national elections in April 2022 are also likely to slow initial proceedings, particularly as France will hold the EU's rotating presidency in the first half of 2022. The Commission will be keen to keep the debt rule talks out of the French election campaign.

"Maybe the relaunch is maybe just a bare announcement, plus some analysis and some timelines," one official said. "I don't imagine that the Commission will come up with (actual) proposals at this point in time."

After the elections, the substantive talks will take time, even if the final result is only to adjust the interpretation of the Stability and Growth Pact, rather than to alter treaties which provide its grounding. The pact caps budget deficits at 3% of gross domestic product and total government debt at 60%, as well as stipulates the speed at which overshoots must be eliminated.

"Given the complexity of the issues at hand, and their importance, in the best of cases this approach will take some time. Whether there is a government in Germany or not, I doubt we would have a consensus by the year end," one senior official opined, adding that consensus will be essential. "I don't think it would be good for any new fiscal framework to start with a tight vote."

Consensus so far has been in short supply. Economy Commissioner Paolo Gentiloni wants the pact altered to allow for excessive debt to be reduced more gradually, though he accepts that it might be impractical to do this via changing European treaties. (See MNI INTERVIEW: EU Can Ease Debt Rules Without Treaty Changes.) Others, such as Commission Executive Vice President Valdis Dombrovskis, insist that the current arrangement has enough flexibility as it is.

GERMAN ELECTION NO GAME-CHANGER

Even if the opinion polls are borne out and Germany's social democratic finance minister, Olaf Scholz, replaces the conservative Angela Merkel as chancellor, the boost to the Gentiloni camp may be modest. Scholz is on record as saying that the current pact does not require major changes. And Scholz's likely partners in the Green Party, who favour more flexibility on borrowing, might be happier taking portfolios like transport, energy and environment than the finance ministry, which is the traditional reward for the junior coalition member.

Meanwhile, Italian Premier Mario Draghi continues to insist that the current rules cannot continue and that high-debt states, like his own, need a more growth-friendly debt-reduction timeline.

For the moment, reform discussions remain informal, with one EU source noting the "range of views" aired by politicians and academics on this topic over the summer. This weekend's ECOFIN meeting will provide an opportunity for finance ministers to air their opinions when they discuss a Brussels' Think Tank paper calling for a Green Golden Rule excluding environmentally-friendly spending from debt calculations and a Green Pact for the next 10 years.

Any substantial changes to the fiscal regime will require the reform process continuing into 2023, by which time the current Stability Pact is set to be back in force after its suspension during the Covid pandemic.

"If, on the other hand, things point to more interpretative changes, and no new legislation, maybe a new or not so new agreement can be in place at the end of 2022, and we can start with the new regime in 2023," one source said.