30th Jun 2022

Euro countries start haggling on fiscal rules

  • European Central Bank governor Christine Lagarde (l), French finance minister Bruno Le Maire and his German counterpart, Christian Lindner at Monday's eurozone ministers meeting in Brussels (Photo: Council of the European Union)
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Eurozone finance ministers on Monday (17 January) had their first debate on how to change fiscal rules for the single currency for years to come, and potentially set the economic growth trajectory for the EU.

The debate also highlights clashing economic philosophies - plus political differences between EU members from the north and the south.

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The rules, the EU's so-called Stability and Growth Pact, are meant to stop governments from borrowing over their capacity in order to safeguard the euro. The pact caps deficits at three percent of gross domestic product and debt at 60 percent of GDP.

During the euro crisis, there was pressure on EU governments to introduce stricter enforcement of debt and deficit rules, and fine governments that break thresholds of the budget rules.

The rules have been often broken - partly leading to the sovereign debt crisis of 2010 - while there has been little political will to actually punish governments that break them. In fact, the sanctions have never been applied.

Moreover, the rules have been suspended since the start of the pandemic, to help governments stimulate the economy, and avoid financial and economic disaster amid the Covid-19 health crisis.

This and historically-low interest rates have led to large public borrowing to fund spending during Covid-19, which has made the reform of the fiscal rules (and exposing the political fault lines around them, underpinned by conflicting economic theories) unavoidable.

The pressure is on: the pact will be reinstated next year after the pandemic suspension. However, any change in the rules would have to be approved by 27 governments.

"The discussion is starting from the realisation that sanctions have not seen that much use. No use, to be precise," a senior eurozone official said before the talks.

"We need to make very clear that we are are not repeating old discussions, but we are addressing a completely new situation. New because of the level of the debt that we all increased in reaction to the pandemic, and because of enormous needs of investments and support to the climate transition that we have," EU economic commissioner Paolo Gentiloni told reporters as he arrived at the meeting in Brussels.

"The issue of fiscal stability, which is crucial, should be addressed within this framework. We need stability, but we need also durable and sustainable growth," he added.

The commission is expected to come forward with concrete proposals in the next months, and the debate is likely to heat up in June.

Old debates?

There are political heavyweights behind creating more flexible rules.

Italian prime minister Mario Draghi and French president Emmanuel Macron are pushing to free their economies from the EU's pre-pandemic structures. They argue that the pact's arbitrary constraints hamper economic growth and contribute to making debt loads unsustainable.

Macron and Draghi face resistance from northern countries, the so-called 'frugals', which say they are more financially-responsible and only want limited changes to the rulebook.

This time these governments also worry that others have become too dependent on the support of the European Central Bank (ECB). Traditionally this second group has been led by Germany.

France's finance minister Bruno Le Maire on Sunday said the pact "as a whole is not obsolete, but the public debt rule is". France will play a key role in finding a compromise as it oversees the EU council for the next six months.

German finance minister Christian Lindner said, in response to his French colleague, that the "we are realistic, and we are no dreamers" regarding the stability and growth pact.

"In my eyes, the stability and growth pact has proved its flexibility during the crisis. Now is the time to build up fiscal buffers again. We need resilience in the public sector again," he added.

"I'll determine our position based on where the interests lie. […] Sometimes we've rallied with France.. on others matters with might be aligned with more with Germany," Dutch finance minister Sigrid Kaag said on arrival at the meeting.

"There is recognition this time that implementation of the rules depends on national ownership. There is strong agreement on this and much of the discussion goes on how to strengthen ownership," the senior eurozone official added.

Italy's public debt is 155 percent, France's 114.6 percent, Spain's 120 percent, Germany's is 71 percent, the Netherland's is 57.7 percent, Austria's is 83 percent, according to the EU Commission.

One possibility is that the debt ceiling will be raised to 100-percent of GDP, and there would be a more flexible attitude to the deficit threshold.

There are also discussions about not counting some spending, such as climate or other strategic expenditure, in the debt calculations.

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