MNI: EU Steers Away From Big Changes To Debt Rules

The European Union is heading for a light-touch revision of its fiscal rules, with an emphasis on sustainable debt reduction combined with scrutiny of states’ spending and investment plans, EU officials told MNI, after the European Commission said it would not reveal its proposals for reform of economic governance until the autumn.

The latest Commission delay, announced on Monday, has made it still clearer that the review of the rules on borrowing and debt contained in the Stability and Growth Pact “will not result in anything major,” one official said.

The EU also last week announced a fresh one-year extension of the so-called “escape clause” on rules contained in the Pact, to help economies cope with both the lingering effects of the pandemic and fresh strains imposed by the war in Ukraine, despite opposition to the move from German Finance Minister Christian Lindner.

“The bottom line is that we now have one year, but we will aim at reactivating the rules in 2024 and maybe in the meantime agree on a slightly revised [fiscal rule] framework,” another official said.

BRIDGE TO AUTUMN TALKS

Finance ministers are now expected to draft a communique on the way forward for fiscal policy and its coordination at their July Eurogroup meeting. This could then provide a bridge to talks on fiscal rules reform in the autumn, one source said.

While countries including Italy and France have pushed for borrowing rules to be changed to make it easier to spend more on investment, any eventual agreement is likely to insist on bespoke debt-reduction plans with targets for investment and reform monitored by the Commission, in line with the ‘ownership’ approach taken by the NextGenerationEU package of Covid recovery aid, officials said.

Discussions on reform gained momentum at the end of last year, but have been stalled since the onset of the Ukraine crisis, with the French EU presidency shifting priorities to helping consumers and businesses cope with rising energy prices.

GERMANY SAYS EXISTING PACT FLEXIBLE

Germany’s resistance to any relaxation of fiscal rules, and its emphasis on the existing flexibility within the current Stability Pact, has made the Commission more cautious about proposing sweeping reforms, sources said.

“Maybe we will have some kind of intermediate step, with the Commission coming up with an interpretative approach towards the existing rules, rather than a legislative approach by the end of the year,” one source said. A further review of the rules could follow in a few years’ time, the source added.

“The member states recognise on both sides [North and South] that you need more of a differentiated approach to the path for debt reduction. I think also there is a recognition that the change of methodology with NGEU is also having an impact on how you scrutinise the implementation of reforms – more ownership and scrutiny also – that seems the way forward.”

The idea, promoted by France and Italy, of excluding borrowing from debt limits for investment in specific sectors, such as the green and digital transitions, defence or energy, seems less likely to win support, this source said.

“There are strong concerns – that if you start carving out exceptions from the rules then others will ask for something else and then ultimately there is nothing left to be counted.”

EU states will also be under increasing pressure to get some kind of an agreement to restore market credibility for their longer-term fiscal plans as the European Central Bank tightens monetary policy, another source said.