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30th Nov 2022

EU Commission pitches loosening fiscal rules for ‘new reality’

  • Italy is struggling with a debt of around 150 percent of GDP, while Greece has seen its debt balloon to 186 percent of GDP after the financial crisis (Photo: wfabry)
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The EU Commission on Wednesday (9 November) presented long-awaited proposals on redrawing fiscal rules for the bloc — after a decade of austerity left European countries exposed to the new challenges of energy and price hikes.

The fresh rules, seemingly inspired by the Covid-19 recovery fund structure, would have governments negotiate a four-year debt reduction path with the commission and then have EU ministers give their green light to it.

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  • EU Commissioners Valdis Dombrovskis and Paolo Gentiloni present the rules revamp (Photo: European Commission)

Those four years could be extended to seven, if the extra time was justified by investment and reforms which match EU priorities, such as fighting climate change.

The commission would then monitor these plans — and sanction a member state that does not adhere to the agreed deal.

EU Commission vice-president Valdis Dombrovskis said the aim is "for a simpler system of fiscal rules with greater country-ownership and more latitude for debt reduction, but combined with stronger enforcement".

The reference values in the EU treaty remain: for the deficit at three percent of GDP, and for debt at 60 percent of GDP.

The proposal would also move away from the one-size-fits-all obligation of annual debt cuts of one-twentieth of debt above 60 percent of GDP, which is the EU threshold for public debt.

Italy is struggling with a debt of around 150 percent of GDP, while Greece has seen its debt balloon to 186 percent of GDP after the financial crisis.

Another idea by the commission is to focus on net primary spending — meaning government expenditure that excludes debt interest. Governments have previously complained that the earlier focus on structural deficit is too complex and less of a stable indicator.

The commission is hoping that EU leaders can agree on the basics of the new fiscal rules at the February 2023 summit at the latest, and then the executive could roll out the legal texts underpinning the rules.

The aim is for the new setup to come into force in 2024.

"Some, like us, will consider it excessively prescriptive towards over-indebted countries, others, like the Nordic countries, will find it unnecessarily lax," Italy's economy minister Giancarlo Giorgetti told a panel of lawmakers on Wednesday, according to Reuters.

"There will be a difficult negotiation," he said.

Germany and other fiscally-conservative countries have been worried that the bilaterally-negotiated deals would allow countries to postpone reforms and investment, weighing down all eurozone countries.

To sway the so-called 'frugal' states, the commission has proposed more robust sanctions, albeit with lesser fines.

However, there is a lack of trust in the commission, which has not proposed sanctions or fines on any member state — despite reinforced rules agreed in 2011 amid the euro crisis — for breaking fiscal rules. Some member states, including France, Spain and Portugal have done so.

"The challenge now is to find agreement by next year. For that France and Germany would need to come together and avoid another open flank in their relations," Johannes Lindner, co-director of the Berlin-based Jacques Delors Centre tweeted.

'New realities'

Austerity during the economic crisis, and then the surge in public debt as governments across Europe paid to support businesses and households amid the Covid-19 emergency, has left debt reduction at the current rate impossible.

The EU in fact suspended its fiscal rules in early 2020, to prevent European economies from crumbling, but the 25-year-old pact is scheduled to be re-actived next year.

Dombrovskis said that the proposals address "new realities" as "almost every member state has broken rules at one time or another".

The former Latvian prime minister said that "debt and deficit levels are significantly higher than a decade ago".

However, the officials stopped short of damning austerity measures that have been held responsible for much social distress over the past decade.

EU economic commissioner Paolo Gentiloni said that "austerity was not strictly linked to these kind of rules," but conceded that with hindsight it is true that investments were not kept at the level they should have been.

He added that debt reduction rules had become "more and more unrealistic". However, the former Italian prime minister added that the three-percent deficit threshold "was useful to signal for governments that money is not for free".

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