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France is arguing for Covid-related debt to be excluded from revamped rules on public borrowing ahead of a review of the eurozone's dormant Stability and Growth Pact, setting up a possible tussle between the bloc's more fiscally hawkish and dovish states in the autumn, Brussels officials said.
Germany and like-minded countries keen on tight budget discipline are resistant to a major overhaul of the pact, whose rules include caps on budget deficits and total public debt of 3% and 60% of GDP respectively. But the French suggestion could form part of a compromise with countries which want easier rules such as Italy, France, Spain and Greece, the officials said.
Such a deal could allow the southern countries to accept the continuation of other Stability and Growth Pact rules, including the stipulation that excessive public debt be reduced at a rate of one twentieth of the overshoot above the 60% ceiling per year, they said.
"If, for instance, the debt rules were to be changed, say from 1/20 to 1/30 or 1/40, because the volume of the debt is higher, that solution would also be fine. France could also live with that, but if the existing 1/20 is to be re-applied on a bigger, post-Covid volume of debt then things could become difficult," one official said. "In that situation, I could see the way to reconcile both is just to take some debt out of the debt to which the debt rule applies".
GENTILONI CALLS FOR CHANGE
An Italian official told MNI that the country supports the suspension of Covid-era debt from SGP rules, and wants a lower requirement for the pace of excess debt reduction. But it is too early to discuss concrete reforms of the pact, though the matter was discussed when Italy's Finance Minister Daniele Franco met his French counterpart Bruno Le Maire last week, the official said.
A French Finance Ministry spokesman did not respond directly to questions from MNI on reform of the Stability and Growth Pact, but pointed to comments by Le Maire, who has rejected tax increases or new taxes to pay off Covid debt. Le Maire has also called on Europe to recognise the "new reality" posed by much higher levels of public debt.
The Stability and Growth Pact is currently suspended due to the economic impact of the Covid pandemic.
EU Commissioner Paolo Gentiloni has argued that higher levels of public debt are more sustainable for longer in the current low interest rate environment. But that argument has run into resistance from fiscal hawks, such as Commission Vice President Valdis Dombrovskis.
The review of the Stability and Growth Pact is not due to start until economic recovery is underway, something which is currently forecast for the autumn, officials said, noting that talks are in "early days".