The European Commission said on Friday (10 September) that it will explore options to improve the Stability and Growth Pact by the end of next year, as member states are preparing for a bruising battle over the reform of the EU’s fiscal rules.
The herculean effort made by member states to cope with the Covid-19 pandemic pushed public debt to unprecedented levels in the EU, expecting to peak at around 95% of GDP in 2021.
This figure is well above the 60% of GDP debt threshold set in the Stability and Growth Pact, the bloc’s fiscal rules now suspended to allow for the extra spending needed to support the European economies. The framework also states that public deficits shall remain below 3% of GDP.
Although the European economy is expected to reach its pre-crisis level by the end of this year, the ECB warned that the speed of the recovery will depend on how the pandemic evolves.
Against this backdrop, EU finance ministers started to discuss this weekend ways to improve the fiscal rules, a decision that potentially would determine the severity of the fiscal adjustments and tax hikes they will have to adopt to rein in their public finances.
The pro-fiscal stability group, mostly made of Northern member states, and Southern countries, in favour of an investment-friendly framework, agreed that the rules need to be simplified, after years of amendments and reinterpretations that have complicated its application.
But both blocs disagree over whether the rules should make more space for investment in some priority areas, such as green initiatives.
In addition, countries including Spain and France and the European Commission argued that the review should relax the efforts to reduce public debt levels, as the current methodology would force to pass draconian austerity cuts on the pandemic-hit economies.
“We will need a debt reduction path that is realistic for all member states. We need to balance fiscal sustainability with the need to support the economic recovery,” European Commission Vice President Valdis Dombrovskis said on his way to the ministers’ meeting that took place in Kranj (Slovenia).
Countries calling to insert more ambitious improvements into the fiscal framework also want the new rules to be in place before the Stability Pact is reinstated, probably in early 2023.
But far-reaching changes could take at least two years, as they would require the approval of the Council and the European Parliament.
For that reason, Commissioner for Economy, Paolo Gentiloni, suggested that the Commission could put forward an interpretation of the current rules next year as a quick-fix.
“We can find instruments if it is not possible to conclude this transformation [of the fiscal rules] before the end of next year,” Gentiloni said in Kranj.
The Commission’s new interpretation of the Pact would factor in the impact of the pandemic on national economies and would come around Spring next year, in time for the member states’ preparation of their fiscal plans for 2023.
EU sources told EURACTIV that “it is clear that a legislative proposal would not be in place by January 2023, even if it is put forward by the end of this year, so we would need to clarify how we are going to interpret the current rules”.
A second EU source did not exclude that the Commission could propose more substantial changes to the fiscal rules in a legislative proposal, in parallel with the fresh guidance offered to the capitals.
The solution will depend on the results of the public consultation that the Commission will launch in the coming weeks, probably in early October, and discussions with member states this autumn to try to narrow the differences.
Gentiloni acknowledged that “now we know there is consensus to build”.
Member states not only disagree over how far the changes should go, but also how quickly they should come.
Quality over speed
A group of eight member states, including Austria, the Netherlands and Nordic countries, said in a letter shared with ministers ahead of the Ecofin that “discussions on improving the current economic governance framework need ample time and should be based on broad consultations by the Commission.” “Quality is more important than speed,” the letter added.
Spain’s economy minister, Nadia Calviño, however defended that the reform of the fiscal rules should be ready “before we exit this exceptional situation”, referring to the suspension of the Stability Pact.
The group of Northern countries stressed in their letter that “simplifications and adaptations that favour consistent, transparent and better application as well as enforcement of the rules are worth discussing, but only if new proposals do not jeopardise the fiscal sustainability.”
But this is not enough in Madrid, Paris or Rome. French Finance minister, Bruno Le Maire defended that investments to reduce the carbon footprint of the European economies should receive a special treatment in the eyes of the deficit and debt limits.
The results of the German elections on 26 September will impact on whether the rules become more investment-friendly. German finance minister Olaf Scholz, who is increasingly becoming the favourite to take over from Angela Merkel, is not in favour of big changes, as he considered that the current rules allowed for enough flexibility, also when extra spending was needed during the pandemic. But the Greens defend loosen debt thresholds to invest in green priorities.