EU reform of fiscal rules hits resistance among big capitals

Brussels faced objections from the three biggest European Union member states after proposing a sweeping overhaul of its debt and deficit rules on Wednesday, as capitals questioned its attempt to strike a balance between strengthening public finances and boosting investment.

Christian Lindner, Germany’s finance minister, warned that the European Commission’s legislative proposals did not go far enough in tackling high public debt in the EU, saying “significant modifications” were needed to make the rules sufficiently sound, binding and transparent.

France took an opposing view, complaining that aspects of the budget regime were too rigid, while Italy said it gave too little scope for investments in growth and the green transition.

The commission’s draft legislation proposes radical changes to the way the body oversees countries’ budget plans, creating a simpler framework with more space for public investment, while attempting to contain fiscal profligacy.

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Valdis Dombrovskis, commission executive vice-president, said the reforms would give countries greater flexibility and ownership of their fiscal objectives, while putting in place safeguards to ensure equal treatment. He added that the EU was “stepping up enforcement so that countries stick to their commitments”.

The draft, which will now need to be thrashed out by the Council of the European Union and the parliament, comes after a surge in debt burdens worldwide during the Covid-19 crisis. The demands of combating climate change and war in Ukraine are now placing additional demands on government spending.

Under the new regime, member states would agree fiscal adjustment paths with the commission over a four-year period, extendable to seven years if matched with credible reforms. The commission added extra “safeguards” to its regime in a bid to reassure Berlin that there would be minimum standards that member states must meet.

However, Lindner, who has long been sceptical about the commission’s push for bespoke debt-reduction deals, warned that safeguards in the proposals were not strong enough. The greater flexibility represented a shift from Berlin’s desire for a common compact covering the entire region to “bilateralising” fiscal rules.

The rules needed “more work”, he said, adding: “No one should labour under the misconception that Germany’s consent is automatic.”

Both Paris and Rome regard the proposals as a step forward in offering countries more say on their debt reduction trajectories, but they also expressed reservations about aspects of the proposals.

Italy’s finance minister, Giancarlo Giorgetti, was disappointed that Brussels had not heeded Rome’s call to exclude investment expenses – especially those linked to the Covid recovery plan and the green transition – from the calculation of deficit targets that countries would have to meet.

Paris believes the commission has gone too far to accommodate Berlin’s demands. France’s finance minister Bruno Le Maire said some parts of the plan “must be reworked” and said Paris was “opposed to uniform automatic deficit and debt reduction rules”, arguing that they were ineffective and widely criticised by academics.

The draft legislation requires countries with budget deficits above the Stability and Growth Pact threshold of 3 per cent will have to push through a minimum fiscal adjustment of 0.5 per cent of GDP a year – even if they are not yet formally in a so-called excessive deficit procedure.

Another French official said it might make sense to have common rules for countries whose deficits were higher than 3 per cent of GDP level, but those below should be given more leeway to set the pace of their debt reduction. France is trying to bring its deficit from 4.7 per cent of GDP to below the 3 per cent target by the end of President Emmanuel Macron’s second term in 2027.

The commission’s enforcement regime would be strengthened by lowering the size of the fines for countries that breach the rules, making it more likely that they will be levied.

Further safeguards would ensure that spending grows at a slower pace than medium-term economic growth, and that fiscal reforms are not backloaded to the end of a multiyear planning period. – Copyright The Financial Times Limited 2023