MNI: Hopes Rise In Dash For EU Fiscal Rule Deal By Year End

Hopes have risen for a deal by the end of the year on reforming the European Union’s fiscal rules after significant concessions to Germany and other so-called “frugal” countries in a proposal presented by Spain, holder of the bloc’s rotating presidency, officials close to the talks told MNI.

Under the “Landing Zone” proposal submitted to negotiations between EU financial officials on Monday ahead of this Thursday’s meeting of finance ministers, states would guarantee a “common safety margin” below the 3% of GDP fiscal deficit threshold in the long term. The size of the margin, which would be applicable to all states regardless of debt level, has yet to be determined and it could be between one or even three percentage points of output, officials said.

The new proposal also contains a provision for public debt ratios above the 60% of GDP limit to fall by a minimum amount during adjustment periods, again with the numerical quantification of that yet to be set.

LONG WAY TO GO

“It was a long meeting yesterday, and the Spaniards made some efforts to bridge the gaps. So, I think it is fair to say there has been progress,” a frugal country source said.

“However, there is also still a long way to go. Some key concerns – e.g. the exact calibration of the safeguards, or the question of the activation of the escape clause, among others – are still open,” the same source said, stressing that there was little chance of a breakthrough this Thursday.

Still, the admission of progress marks a significant change of tone in talks which have stalled over recent months as the Spanish presidency struggled to find a landing zone between Germany and the frugal states pushing for strict enforcement of rules and southern states wanting more flexibility and room for investment.

While officials stressed that agreeing the actual numbers to fill in the proposed landing zone will be a protracted negotiation, speculation is swirling in Brussels that a Franco-German deal is in the making. Those rumours have been reinforced by a visit to Berlin by France's Treasury head Emmanuel Moulin on Monday.

ECB CONCERNED

Failure to agree a deal this year would herald the return of the old Stability and Growth Pact rules, due to come back in force from January, at a time when debt costs have risen and the economy is slowing, with little prospect of progress in negotiations in 2024 until after June’s European Parliament elections. The European Central Bank, concerned by possible market doubts over the bloc’s fiscal promises, has urged governments to quickly strike agreement. (See MNI INTERVIEW: Bond Sell-Off Makes EU Fiscal Deal Crucial-Buti)

On the other side of the negotiations, higher debt states, such as Italy and Greece, want easier qualification for extended adjustment periods, during which they are permitted to hold debt levels stable for seven rather than the usual four years. These countries argue that reform and investment commitments made under the EU’s NextGenerationEU programme should be enough to qualify for the extended period, but this has been opposed by Germany and the Frugals, who are concerned that such a concession might open the way to more granting of EU aid in the future. (See MNI: EU To Allow Italy Some NGEU Spending After 2026-Officials)

Other questions still open include differences over whether the European Commission or the Council grouping member states should have the power to suspend fiscal rules by activating the so-called “escape clause”. The fiscal states also want a stronger role for the European Fiscal Board in ensuring rules are enforced.

The frugal source said the Spanish Landing Zone paper was likely to be further tweaked ahead of Thursday’s ECOFIN to reflect the feedback at Monday’s meeting but added that all the main elements of the document are likely to be included.