MNI: Easier Debt Rules Would Ease Calls For NGEU2-EU Officials

European Union officials see scope for the bloc to consider loosening its rules on public borrowing in a bid to defuse calls by some countries for a major new fund to help cope with the consequences of the war in Ukraine.

The more flexibility allowed in the Stability and Growth Pact, which sets limits on budget deficits and national debt, the less member states will have need of help to pay more for defence and replace Russian gas from what has already been dubbed NextGeneration EU II, in reference to the EUR800-billion-plus NextGenEU fund agreed in response to Covid, the officials told MNI.

While there are no active discussions on NGEU II, the idea has been floated by France and taken up with enthusiasm by Italy, with the two countries and with their allies possibly making another push for talks on the proposal at the May 24 meeting of EU finance ministers, in the face of strong opposition from more fiscally conservative states. (See MNI SOURCES: Italy Seeks EU Cover For Borrowing As Yields Rise)

Officials stress that the EU’s current focus remains firstly on whether to extend the suspension of the Stability and Growth Pact rules which was enacted during the pandemic through 2023. Such an extension of the so-called Escape Clause is “very, very likely” in May following the Commission’s Spring Economic Forecasts and Fiscal Policy Guidance for 2023, one source said.

In tandem, the bloc will also discuss the implementation of National Recovery Plans which govern the spending of funds from NextGenEU.

MORE FLEXIBILITY

But an ongoing debate on reforming the EU’s fiscal regime due to get underway again in July will have a major bearing on the calls for a NextGenEU II, officials said.

“If member states themselves are allowed to have more flexibility, then that decreases the need for a new instrument,” an EU source said. “There are different options and all of them are inter-related. So, what you do about the fiscal rules will have an impact on a possible further instrument and vice versa.”

The Commission has said it will publish its “concept” of how a new and reformed Stability and Growth Pact will work in July and, following feedback from finance ministers, will make a proposal before the end of the year.

Germany – which acted as paymaster of the current NGEU - may be less in favour of EU measures to pay for the impact of the war in Ukraine, given it is one of the states most impacted by increases in energy prices and potential disruption of Russian gas deliveries, officials noted.

ROLE OF ECB

Other states are also wary of more fiscal stimulus of any kind, given current high inflation levels and little sign that growth is faltering.

“Why additional fiscal stimulus if inflation is already in double digits in some countries?” one official from such a state said.

If additional fiscal support does end up coming exclusively from the national level, officials concede that this is likely to put pressure on the European Central Bank to spell out more clearly its currently vague plans for an anti-fragmentation tool to prevent intra-EU government bond spreads from widening if more vulnerable economies come under market pressure.

Talks on such a new tool are said to be complicated by legal issues. Similar tools in the past have been tied to participation in a European Stability Mechanism programme, as is the case with the Outright Monetary Transactions programme, or, in the case of the Public Sector Purchase Programme, were eurozone wide, and officials said it was not clear how a new mechanism could be designed without such constraints.