'Crunch time' for EU's debt and deficit debate

The so-called Stability and Growth pact has been suspended since early 2020 as the EU Commission sought to revamp the rules that limits national debt to 60 percent of GDP and deficits to three percent. But three years later, the needle has barely moved.

"We are approaching crunch time," said trade commissioner Valdis Dombrovskis. "Hopefully, we can finalise an agreement in March."

If an agreement isn't reached, existing rules will likely be re-imposed in 2024, Gentiloni warned. "We need rules that are fit for purpose, and the existing ones are only partially fit, and on this everyone agrees I think," he said.

Up for debate is how to reduce national debt without hampering individual member states' ability to grow and invest. In November, the commission published a communication proposing new rules that insert more flexibility for countries while maintaining common rules.

It would ditch the widely-disliked five-percent-annual reduction rule for debts exceeding 60 percent of GDP, for a more tailored debt-reduction pathway.

In return, the EU Commission would have more oversight on national budgets. This would be tied to pre-agreed reform and investment pledges — a modus operandi similar to how the €700bn Covid-19 relief funds have been allocated. This will improve "ownership" by the member states, and "what has been agreed had to be done," said commission president Ursula von der Leyen at the time.

Member states now aim to strike a deal at the meeting of finance ministers next month in preparation for the council of leaders on 23-24 March. "Achieving a balance between country specificity on the one hand and equal treatment and predictability, on the other hand, is key," said Sweden's finance minister Elisabeth Svantesson, who chaired the meeting.

The need to update the rules is critical because European countries are boosting investments in clean tech to compete with the €342bn green subsidies under the US Inflation Reduction Act.

"There is much work to be done, but around some elements, we are seeing consensus forming," said Svantesson, adding that views among member states haven't sufficiently converged yet.