MNI: Green Retreat Cuts Chances Of Eurozone Debt Pact Reform

By David Thomas

BRUSSELS (MNI) - The chances of an ambitious easing of European Union rules on public borrowing in talks due to start in the autumn are receding together with the prospects for a Green-led German government, and amid signs of stronger growth as economies reopen, EU officials told MNI.

While talks on reforming the Stability and Growth Pact are likely to last at least until the end of next year, the centre of gravity in early discussions has shifted in favour of more fiscally-conservative northern member states which want minimal or even no change to the rules, officials said. They are increasingly confident they will be able to resist any modification to the Pact's keystones, including its budget deficit limit of 3% of GDP and the limit on public debt of 60% of GDP, they said.

"Those pushing a more radical reform may have become more realistic," said a source from a middle-ground country, adding that he expected only "cosmetic changes", even after September's German election is out of the way.

"By the time it's done, we will have the French election coming (April), or not long thereafter. So, I don't see big things happening for almost all of next year," the source said.

Hopes by those such as Italy favouring a looser SGP surged in the spring as Germany's Greens edged ahead in opinion polls, but the governing Christian Democrats, who have made clear they want no change to the fiscal rules, are now back well in front. The Social Democrats, long the strongest party of the German left, also oppose a looser SGP.

NO TREATY CHANGE

"At the moment, I do not see a landing zone," said a source at an EU finance ministry, noting that altering the 60% debt or 3% deficit criteria would require modifications to EU treaties. "In my understanding, the Bundestag would have to give prior approval. I do not see this happening in Germany."

Stronger eurozone economic data have also emboldened the so-called frugal countries and fiscal hawks, like Germany, which are now likely to call for governments to focus on bolstering their fiscal resilience.

"During the financial crisis, the aim was to make banks more resilient, not to loosen the rules to foster a recovery. The same holds true for sovereigns now – they must be made more resilient," the finance ministry source said.

Officials suspect such views may be aired at Monday's Eurogroup meeting of eurozone finance ministers, despite the fact that fiscal rules reform is not on the agenda. The debate on the European Commission's new, stronger economic forecasts will provide the perfect opportunity for such interventions, sources say.

Officials increasingly expect the review of Europe's economic governance to focus on the speed of debt reduction in higher-debt states, such as Italy, Spain and France.

A pledge of "flexible interpretation" of the SGP requiring excess debt loads to be reduced by 1/20 a year is the most that can be expected of the review, said the first source.

COVID DEBT

"Maybe amendment of this part of the legislation (introduced following the SGP reform of 2011) will not be necessary – maybe there can be a common understanding, which the Commission could propose, and the ministers could sign off. Apart from this, there is not much alternative."

Alternatively, member states could accept an idea promoted by French Finance Minister Bruno Le Maire, who wants to leave COVID-related debt out of the fiscal rule calculations, the source said, though he noted that it had still to be discussed by finance ministers.

Such a concession might appeal to hawks since it would not involve making the existing rules more flexible, while still having obvious attractions for those high-debt states emerging from lockdowns with even bigger debt burdens, the source added.