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21st Jul 2019

EU countries may run higher deficits if they invest, reform

Member states who chip into an upcoming investment fund, implement structural reforms or co-fund EU infrastructure, or youth employment projects will be allowed to run slightly higher deficits, the EU commission said Tuesday (13 January).

The countries' structural reforms - either adopted or planned, but with a detailed implementation schedule - will be considered when a country is close to or in breach of the three-percent deficit rule, the commission explained in a document outlining how it will apply "flexibility" within the EU deficit and debt rules.

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The same goes for investments, as national governments have to co-fund EU projects, notably in infrastructure, research and to spur youth employment.

But any "deviation" from the fiscal consolidation path has to be caught up within four years and should not bring a country above the three-percent deficit rule.

"We are not changing existing rules, but the smarter application of the Stability and Growth Pact will help us make more decisive progress in pursuing structural reforms, investments and fiscal stability," EU economics commissioner Pierre Moscovici said.

This is likely to give France, Italy, and Greece more leeway in meeting deficit and debt targets.

Asked if the 0.5 percent of GDP in terms of structural reforms announced by France will be enough to let Paris off the hook in March, when the commission is due to announce if it will punish France or not, Moscovici said: "It is too early to say. I don't know if it will be sufficient, but it is absolutely necessary."

Italy, who is not under excessive deficit procedure, but has a debt burden of 130 percent of GDP, more than double the EU threshold (60%), which can trigger the procedure, is also likely to be let off the hook.

It has presented a reforms plan which can be accepted by the EU commission as long as Rome actually sticks to it.

Socialists in the European Parliament welcomed the explanatory document as a "as a significant step to change the direction of Europe".

"Europe is moving away from blind austerity. We can now use the Stability and Growth Pact and the fiscal treaty in a smarter way," Socialist group leader Gianni Pittella said.

Investment fund

Meanwhile, EU commission vice-president Jyrki Katainen has presented a legislative proposal setting out the European Fund for Strategic Investments, which currently relies entirely on a €21 billion guarantee from the EU budget and the European Investment Bank.

He said the fund will welcome national contributions in the hope to mobilise €315 billion in investments over the next three years.

So far no member state has announced its intention to contribute to the fund.

If they do, they will be granted a seat on the "steering board" of the new fund, which will set out the investment guidelines and the level of the risk the EFSI will be able to cover.

The fund is intended to attract private investors like pension funds by financing the riskiest parts of projects where prudent investors are normally not allowed to contribute.

Katainen insisted that the selection of the projects will steer clear from any political influence by national governments, as it will be done by a special committee of independent experts, who will have salaries from the fund.

Any revenues from the fund above 50 percent will go back to member states.

"The timetable is very ambitious, we want to have these proposals adopted by June - so the pipeline and fund are operational by the end of summer," Katainen said.

Experts and national politicians in recent weeks have questioned the mathematics of the fund, which aims to attract €15 for every €1 spent by the EU.

Voodoo economics

Unicredit chief economist Erik Nielsen on Monday said during an event in Brussels that the plan "looks a bit like voodoo" and is unlikely to reach the €315 billion target.

He said private investors are too risk-averse even though they should not be.

The Polish finance minister, Mateusz Szczurek, earlier this month also questioned how this fund will work and said he has evidence from commercial banks that they are being crowded out by the European Investment Bank (who will host EFSI).

He also warned they will be "turned off" by the 15-fold leverage factor.

BusinessEurope chief Markus Beyrer, representing EU businesses and employers, said the draft legislation "takes us a step closer to the launch of the European Fund for Strategic Investment which can form an important part of an investment-driven EU recovery".

But he also noted that more is needed in reducing "unnecessary and overly expensive regulation ... bringing down costs of doing business ... [and] allowing better access to finance and scrapping barriers to the single market" in order for the recovery to pick up.

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France has passed a new tax on tech companies that will affect US global giants like Facebook. Donald Trump has threatened retaliatory tariffs over it. The EU commission says it will "coordinate closely with French" on the next steps.

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