22nd Mar 2023

Looser EU fiscal rules agreed, with 'country-specific' flexibility

  • Economy commissioner Paolo Gentiloni stressed the rules should be fit for 'new realities' (Photo: European Commission)
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EU finance ministers on Tuesday (14 March) agreed on new European debt and deficit rules. Economy commissioner Paolo Gentiolni ahead of the meeting had stressed the new rules would need to take into account "new realities" such as the energy crisis.

The measures ministers agreed on copied much of the previously existing rules deactivated by the EU Commission at the start of 2020 for being too strict to deal with the Covid-19 crisis. Crucially the three-percent deficit limit remains intact, and debt should remain limited to 60 percent of gross domestic product.

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The big difference is that debt reduction will now be made "country-specific" and allow for more flexibility. Finance ministers want to ditch the one-size-fits-all rule, requiring all debt above 60 percent of GDP to be reduced by five-percent annually.

Instead, countries and the EU Commission will negotiate a debt-reduction plan based on the economic situation, which should also cover "reforms and investment."

An added backstop is that debt reduction should start within four to seven years. There is also some language on minimal debt-reduction levels, a point pushed for by Germany and the Netherlands, but no details have been presented on this yet.

Long negotiations ahead

The proposal mostly follows an earlier commission proposal from November last year. But an agreement of ministers was necessary to get approval from EU leaders at their top-level summit next week. Only then the EU Commission can make an official legislative proposal in April. The hope is this leaves enough time for countries to then finally agree on a definitive set of rules before elections in spring of 2024.

Although plans were able to proceed, deep disagreements between member states remain. German finance minister Christian Lindner especially has been vocal in pushing hard for rules and enforcement to be as strict as possible. Once fiscal rules are reactivated, it is "the law", and "we demand states do business as the law requires of them," Lindner said on Monday, ahead of the two days of negotiations.

Especially the Nordic member states, the Netherlands and Germany, prefer for debt and deficit rules to be defined by common denominators as much as possible. But it remains an open question how strictly common rules can be imposed.

The EU economy is still in "uncertain" and "volatile" waters," said Gentiloni. One of the realities the rules need to deal with is an ongoing energy crisis. The disruption caused by the Russian invasion of Ukraine and the ensuing energy crisis has strained public coffers. High energy bills and inflation forced member states to adopt income support measures estimated by the commission to cost up to two percent of GDP in 2023.

Another reality is not all EU member states are equally up to the task.

Green spending

A recent analysis made at the commission's request found that only three member states (Sweden, Denmark and Luxembourg) would be able to make the minimal amount of investments to achieve emission reduction targets (estimated at 1.1 percent of GDP) while meeting proposed debt and deficit limits.

All other members would need to cut public spending elsewhere, opening up the possibility of a new form of 'green austerity.'

The economist Paul van den Noord, who authored the commission research, noted that Italy would face a "Herculean" task to reduce debt and deficits while achieving its required investment targets.

EU green funds could help poorer members bridge this gap. But EU funds in practice often flow towards affluent regions with the human capacity to write investable plans, while poorer provinces see their plans more often rejected.

Combined with strict enforcement of common fiscal rules, this could compound existing problems of inequality within the EU. "Italy, France and Greece would face far more restrictions under the proposed rules than Germany, Sweden and Austria," said Sebastian Mang, senior campaigner at the British think-tank New Economic Foundation.

Instead, "the EU should focus more on ensuring all member states can plug the green spending gap," he said.

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