MNI: EDPs Give EU Early Test Of New Fiscal Rules-Officials

Allowances for times of higher interest rates and boosting defence spending will do little to mitigate the severity of Excessive Deficit Procedures set to be opened against as many as 11 countries including France and Italy next month in a significant early test of the European Commission's ability to enforce its new fiscal rules, officials in Brussels told MNI.

Under the new fiscal rules, countries are allowed to smooth out interest rate payments over the course of medium-term debt reduction plans, reducing the bill at times of cyclically high rates, but this would only shave a maximum of 0.1% to 0.2% of GDP off a 0.5%-of-GDP minimum annual deficit adjustment, officials said. The saving could also be much less for countries with deficits well in excess of the 3%-of-GDP limit and for those facing higher market rates, they added.

Nor will any allowance for defence spending produce many savings for the countries set to be slapped with EDPs by the European Commission in its annual policy recommendations to EU states on June 19. While the EDPs will be assigned under the outgoing fiscal rules, the allowances under the new regime will be taken into account as relevant factors, to ensure consistency with the new framework of fiscal structural plans.

France had a budget deficit of 5.6% of GDP last year and Italy 7.2%, with neither set to fall by much this year.

NATO TARGET

The Commission considers that obligations such as defence remain a top priority despite the budget strictures, and will stress that tough spending choices will have to be made as member states comply with the requirement to aim for fiscal deficits of 1.5% of GDP in normal years. Italian officials have already complained that it will be hard for them to achieve the NATO target of boosting defence spending to 2% of GDP, despite the allowance for defence under the new fiscal regime. (See MNI INTERVIEW:Any NGEU2 To Focus On Cross-Border Projects-Buti)

In September, all member states will also have to present four-to-five-year medium-term fiscal structural plans detailing how they will comply with the new fiscal rules. These will have to incorporate the requirements of EDPs for any countries facing these, and ensuring the two regimes are consistent will require high-level political judgement within the Commission, officials said.

While countries falling short of their fiscal structural objectives could face a “debt-based” EDP, the new rules also allow for the plans to be extended to seven years, in return for commitments to reforms and investment. Officials in Brussels will be wary of the temptation for countries struggling to reduce spending to back-load commitments to debt consolidation, and Germany and the so-called “frugal” states will be on high alert against any backtracking in what will be an early test of the Commission’s ability to ensure compliance with the new regime. (See MNI: At Least 4 EU States For 7-Year Debt Plans-Officials)