27th Sep 2021

EU deal on eurozone rules after MEPs back down on debt fund

  • The deal kicks a eurozone debt redemption fund into the long grass (Photo: Luc Mercelis)

EU lawmakers reached a deal on tightening the eurozone's economic governance rules on Wednesday (20 February), after MEPs conceded defeat on the swift creation of a fund to pool sovereign debt.

The deal, which has to be signed off by governments before a final vote in Parliament next month, tightens the EU-level scrutiny of national budgets.

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Eurozone countries will now be required to submit their budget plans to the European Commission and euro finance ministers to ensure that their proposals will keep to the eurozone's debt and deficit limits.

It also increases the EU executive's oversight for countries receiving a bailout package, including obligations on governments to address the weakest sectors of their economy, alongside Commission-led review missions and quarterly reporting.

The two dossiers follow the economic governance 'six pack' agreed in 2011, which gives Brussels the power to request additional cuts to national budget programmes it deems to be unrealistic. It can also impose fines for non-compliance with deficit and debt reduction plans.

Centre-right deputy Jean-Paul Gauzes said that the new regulations would make it possible to take "quick, clear and decisive actions" for the eurozone's crisis countries.

MEPs and ministers had been deadlocked since last summer after MEPs, led by the Socialist and Liberal groups, insisted on a review clause requiring the European Commission to present plans for a Redemption Fund as a first step towards the mutualisation of sovereign debt.

However, under the compromise struck by the Irish presidency, the Commission will set up an expert group to examine the creation of a Redemption Fund, as well as a system of Eurobills to replace short-term sovereign debt.

According to the declaration to be presented by Economic commissioner Olli Rehn, the expert group will be tasked with focusing "articular attention to sustainability of public finances, to the avoidance of moral hazard, as well as to other central issues, such as financial stability, financial integration and monetary policy transmission."

The experts have until March 2014 to prepare their findings, six months after the next federal elections in Germany.

The idea of creating a Redemption Fund to pool all sovereign debt from eurozone countries above the 60 percent threshold in the Stability and Growth Pact, is the brainchild of the German Council of Economic Experts.

The plan has met stern opposition from a number of governments, including Germany, anxious that debt pooling would leave their taxpayers liable for other countries' debts. Due the 'no bailout' rule contained in the EU treaties, which prohibits the mutualisation of government debt, treaty changes would probably be required for a Redemption Fund.

Meanwhile, as part of a review clause demanded by MEPs, the EU executive will table legislation before the end of 2013 aimed at loosening the rules of the Stability and Growth Pact to allow governments to invest in public infrastructure projects. It will also set out plans to offer financial help to government reforms to boost their labour market competitiveness.

Elisa Ferreira, the Socialist group spokesperson on economic governance, emphasised the need for the governance rules to focus on more than just budget discipline.

"Austerity is not delivering the desired results so it cannot be the only component of our response to the crisis. We need to adapt the medicine," she said.

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