MNI: EU's Likely New Fiscal Deal Sounds Tough, Details Lacking

A likely deal on new European Union fiscal rules imposing tighter budget deficit requirements will imply a more restrictive fiscal stance across the bloc in theory, but details are still lacking and the European Commission’s broad discretion to interpret the new arrangement could mean significant flexibility in practice, officials told MNI.

Finance ministers are set to agree key elements of an overhaul of Europe’s Stability and Growth Pact at a video conference later on Wednesday after German Finance Minister Christian Lindner and his French counterpart Bruno Le Maire came to a compromise now expected to be approved by the bloc as a whole.

Under the Franco-German deal agreed overnight, countries will be required to aim for budget deficits of no more than 1.5% of GDP, though the 3% ceiling remains the point after which Excessive Deficit Procedures are triggered. An earlier Spanish compromise paper proposed that states should make annual deductions in their deficits of either 0.2% of GDP or 0.3% until the so-called “resilience margin” 1.5% level is reached, depending on whether a government has an adjustment programme of seven or four years.

In another concession to Germany, calculations of deficits will also will be based on the tougher structural rather than the primary measure favoured by Paris. In return, Germany agreed to allow countries’ deficit calculations to spread out the burden of debt interest payments over the duration of any adjustment programme.

TOUGH ON SURFACE

Officials said the deal sounded tough on the surface, but the devil will be in the detail, and in the implementation.

“I think it depends - it's a compromise, and the Commission still has a lot of discretion,” said a source from one of the so-called “frugal” countries.

An official close to Eurogroup President Paschal Donohoe agreed.

“I think a lot will come down to the Commission and enforcement,” the official said. “It is still difficult to have a good overview on all the parameters and what the overall picture is.”

The ministers also agreed on the maximum allowed deviation allowed from spending plans over the course of an adjustment programme – a key metric for the Commission’s new debt sustainability approach.

The agreement looks likely to make it easier for high-debt states to extend adjustment programmes to seven from four years. A specific carve-out from debt calculations for investments was agreed for defence spending, though countries including Italy wanted more areas exempted.

While France and Germany have insisted that Italy will live with their joint agreement, Rome is said to be disappointed by some aspects of the deal, and particularly by the failure to carve out interest payments from deficit calculations.

"We won't say anything, unlike others,” an Italian government source said, adding “Later you will hear more.”

While Germany and France expect the rest of the EU to approve their agreements later on Wednesday, any deal will also have to survive negotiations with the European Parliament next year, where a compromise between the Socialist S+D and centre-right EPP blocs proposes significantly easier reductions in public debt.