European Union finance ministers have moved closer to an agreement on new fiscal rules for the 27-nation bloc, but agreement is still a long way off as major disagreements remain over the pace of debt reduction.
What has happened is that the strict rules of the Stability and Growth Pact have been suspended since 2020 because of Covid and the war in Ukraine, but will be reinstated from 2024 and EU governments want to update them by the end of the year before they are reinstated.
The Stability and Growth Pact is currently based on the following four main fiscal rules:
1. the deficit rule: a country meets the requirements if the general government budget balance is at or below -3% of GDP, or if the deviation is small (0.5% of GDP or less) if the threshold of 3% of GDP is exceeded, and is limited to one year only.
2. The debt rule: a country meets the requirements if the debt-to-GDP ratio is below 60% of GDP or if the surplus above 60% of GDP has decreased by 1/20 on average over the last three years.
3. Structural balance rule: a country qualifies if the structural budget balance of the general government is at or below the medium-term objective (MTO), or if the MTO has not yet been reached but the annual improvement in the structural balance is at or above 0.5% of GDP or the residual gap to the MTO is below 0.5% of GDP.
4. expenditure rule: a country complains if the annual growth rate of primary government expenditure net of discretionary revenue measures and one-off measures is at or below the 10-year average nominal growth rate of potential output minus the convergence difference needed to adjust the structural budget deficit in line with the structural balance rule.
Member states have gone very far beyond these strict standards because of Covid, and now the European Union is trying to see how it can reduce the debt. Italy, which has the second highest debt burden in the EU, wants a relaxation of rigid restrictions on public debt and budgets, while German officials favour strict surveillance. Germany wants all EU member states to be obliged to reduce public debt by at least 1% of GDP a year.
The European Commission would not insist on numbers, saying any debt reduction over four years would be fine. The four years could be extended up to seven years if the government invests in areas that the EU considers a priority, such as tackling climate change. France is also prepared to accept the numerical debt reduction target demanded by Berlin, if it is set as an average over four to seven years, so as to take account of year-to-year fluctuations.
Spain, which holds the rotating EU presidency and is therefore responsible for finding a compromise, had wanted to have a draft legal text of the rules ready by Thursday, but disagreements were too great and Madrid proposed only narrowing the differences, known in EU jargon as the « landing zone ».
EU officials were also divided over Spain’s proposal to give more time for debt reduction if it simply implements the reforms listed in its post-Covid recovery plan, which focuses on making the economy greener and more digital and is the basis for access to money from the EU’s economic recovery fund.
Only German Chancellor Olaf Scholz is optimistic. He says EU countries are close to reaching an agreement on reform of the bloc’s controversial debt rules.
