29th Nov 2023

Frugals on top in new EU proposal on debt rules

  • Vice president Valdis Dombrovkis said countries would have "no excuse for failing to deliver" under the new proposal (Photo: European Commission)
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The EU Commission's proposed new debt rules give capitals more power over their own spending, but still envisage tough fines for profligates.

That was the gist of ideas for a more flexible approach to debt put forward on Wednesday (26 April).

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The changes would give member states more "ownership" of the regime, which should lead to "greater compliance," commission vice president Valdis Dombrovkis said in Brussels.

"It is under [member state] control, so there are no excuses for failing to deliver," he added.

The goal is still for countries to reduce debt to 60 percent of GDP and keep deficits below 3 percent, but under the new model the commission and member states in breach of these limits would negotiate debt-reduction plans.

These plans would need approval of the commission and other EU members, and if approved by all, would commit governments to reduce debt by 0.5 percent of GDP within four years.

In a demand made by Germany, who has pushed for stricter rules, the debt-reduction plans wouldn't need any extra commission action on top, such as an 'excessive deficit procedure', in order to enter into force.

Atomic option no more

According to economy commissioner Paolo Gentiloni, the new proposal is "qualitatively different" from how fiscal governance was arranged before.

"Now, the governments themselves are responsible for the plans and [the plans] are for the longer term," he said.

This made the system seem less like Brussels' diktat and increased the sense of "ownership," Gentiloni added, also using the commission's word du jour on Wednesday.

The proposal is different from existing rules, which were suspended in 2020, when governments needed financial space to deal with the Covid-19 pandemic, and, more broadly, because the rules were already deemed ineffective.

Those 'one-size-fits-all' rules obliged all countries to reduce debt by 5 percent yearly — 10 times more than current proposed rules.

Sanctions amounted to 0.1 percent of GDP — an "atomic option which is why it was never used," one EU official, who spoke anonymously, told EUobserver.

This is where the new system differs most "radically," they said.

Now, the commission proposes a fine of 0.05 percent if a country is in breach of its agreement, which can gradually increase to 0.5 percent of GDP "if no action is taken," said the official.

Germany strikes back

In many ways, the latest commission proposal is similar to a draft version floated in November last year, but following strong pushback from Germany's liberal finance minister Christian Lindner, concessions were made to strengthen fines and debt-reduction benchmarks.

Managing director of the Eurasia Group Mujtaba Rahman also suggested EU Commission president Ursula von der Leyen may have moved more to the German position because she needs Germany on her side if she "wants to win a second mandate" for commission president next year.

The new fines proposal will make for tough negotiations with France, Spain, Italy, and Belgium, who are in breach of deficit rules and would need to cut spending significantly.

But Lindner, in a statement, said current rules are not strict enough: "We work constructively, but no one should be under the misunderstanding that Germany will automatically consent to the proposals."

"The Germans are staking out a tough negotiating position, which isn't too bad for us as it moves the needle slightly more to where we want to have it," one EU diplomat representing a frugal country also told EUobserver.

"But this is only the start of a very technical phase of the legal negotiations. So I think it's safe to say it will take some time to hammer out a deal," they added.

A final agreement is expected before the end of the current commission's term, "at the latest possible moment" next year.

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