The EU is set to have other things on its mind than reforming its fiscal rules during what could be a bleak autumn and winter.
A winter energy crisis could further push back already-delayed talks on overhauling the European Union’s fiscal rules, as likely calls for joint spending in response to a gas shortage sideline the prospects for any discussion of long-term debt sustainability and financial prudence, officials told MNI.
The European Commission has promised a “concept” for reform of the fiscal rules contained in the Stability and Growth Pact by the end of September, but given past delays and possible gas rationing, the chances of a further large delay are significant, officials said. An earlier plan for overhauling rules including limits on budget deficits and total debt was postponed during the Covid pandemic, as member states turned instead to approving the EUR800 billion NextGenerationEU recovery fund.
Further sapping momentum from the fiscal talks are the persistence of big disagreements between northern and southern states over how to define sustainable levels of financing. Incentives for fiscally weaker countries to agree to new rules are also weak, with the Stability and Growth Pact rules suspended until the end of next year as a Covid relief measure, and the European Central Bank about to reveal a new tool to suppress excessive bond spreads.
“Already we have different views on what is needed for balance between sustainability and growth, and different views on whether you should have a central fiscal capacity for some kinds of investment,” one source said. (See MNI: EU Steers Away From Big Changes To Debt Rules)
“The other question is how we find that right balance in the current environment when it’s already difficult and what is happening now is going to change the whole landscape.”
The Ukraine war and Russian gas shutdowns have cast a deep sense of gloom about the economic prospects for the autumn and winter over the EU’s institutions. The Commission announced a Winter Package earlier this week to coordinate cuts in gas consumption across the EU should Russia opt for a total shutdown.
“The Russians know exactly what our weaknesses are,” one official said. “It will be difficult to explain to people in the autumn that they have to freeze or starve, and this war will not be over by the autumn.”
Against such a grim backdrop, one official said he did not see how EU leaders would have the bandwidth for tough negotiations on any new fiscal regime.
“It depends on how long war lasts and how is it going to end and if it stays a kind of frozen conflict and what will be our relations with Russia. In turn that could reshape how we think about economic governance,” one EU official closely following the fiscal dossier said.
A small test of the appetite of the EU for joint borrowing will be financing Ukraine’s macro-financial assistance programme.
The EU wants to disburse the promised EUR9 billion before the summer, but this would completely deplete EU Budget Macro-Financial Assistance funds, and so must find new resources. And Ukraine will need much more in future.
“It’s difficult to know how much Ukraine will need when it can no longer finance itself,” one EU source said.