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MNI: EU To Signal Return Of Debt Rules After Fresh Suspension

European Union rules on public borrowing will be waived for another year, but arguments are brewing for the future.

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The European Commission will officially confirm next week the extension of the escape clause from the Stability and Growth Pact until the end of 2022, but stronger data and forecasts as the economy recovers from Covid may prompt it to stress that the European Union's rules on public debt and deficits will eventually have to return, officials told MNI.

Tension on the topic between EU member states was in evidence at weekend talks between finance ministers in Lisbon, with some countries already rehearsing arguments ahead of an overhaul of the SGP due in the autumn. But, while countries calling for greater fiscal leeway are chafing at rules including a limit on public debt of 60% of GDP and minimise long-term dangers of inflation, the so-called frugal group including Austria, Denmark, the Netherlands and Sweden want a clear signal the pact cannot be suspended for ever.

One Frugal member state finance official said the Commission could gain approval of a further extension of the escape clause, which suspends the debt rules and was first enacted during the Covid crisis last year, by setting out the criteria for a return to normality.

"What they will probably do is to give more details on the exit plan. Which is good, given that markets are worried about the uncertainty," said the national finance source.

A NEW PACT

But if the Commission does go down that route, its words are not likely to be overly prescriptive.

"I think the Commission will give more guidance on June 2. It [escape clause exit] will depend on the state of the economy, but I don't expect numerical conditions," a second EU official opined.

When the escape clause ends, a reformed Stability and Growth Pact needs to be ready to take the place of the old one, officials agreed, with one saying "We are not going back to the old rules."

Meanwhile, as the recovery gains traction, the current consensus within the European Council could begin to fray, with the reservations of the Frugal states already more pronounced:

"I find it rather difficult that - if you said in your forecasts that member states will be at pre-crisis levels at the end of the year - and then we continue to drive the escape clause across the board for another year, I find that difficult to justify for certain member states," an official said.

"Whatever they come up with there will need to be some narrative around it," the official added.