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EU to examine changes to debt-reduction rule

EU budget rules updates

The EU will examine whether its debt reduction rule needs to be overhauled given the surge in public debt burdens during the Covid crisis, a senior Brussels policymaker said, as the debate over reform of the union’s controversial Stability and Growth Pact begins to intensify. 

Valdis Dombrovskis, executive vice-president at the European Commission, said the EU would look at concerns that the commission’s existing regime was not “realistic” given the big rise in many member states’ debt-to-GDP ratios during the Covid-19-induced slump. 

A forthcoming commission consultation would also look at calls for certain public investments to be granted more favourable treatment under the debt and deficit rules, he said on Saturday.

Dombrovskis’s words come as EU finance ministers prepare for a politically charged debate over if and how to reform the union’s budget framework after member states’ borrowings skyrocketed during the pandemic.

The EU suspended its usual spending rules last year in response to the crisis, giving member states more scope to support their economies, but they are due to be reimposed in 2023. 

On Saturday EU finance ministers and policymakers meeting in Slovenia held early discussions on what to do about the labyrinthine and unpopular pact.

The commission and member states are approaching the topic gingerly given the deep and longstanding divisions between fiscally conservative states in the north, and capitals in the south that wish to see them overhauled. 

Among the topics under discussion in Slovenia was an EU rule that requires a 1/20th per annum reduction in debt ratios from member states with debt above the EU’s 60 per cent of GDP ceiling. 

Many capitals acknowledge that the rule would impose far too brutal a fiscal retrenchment on some member states, given the EU’s overall public debt burden is headed to 94 per cent this year, with Italy forecast to hit a debt ratio of around 160 per cent. 

Dombrovskis, who is seen as conservative on fiscal matters, said the debt rule was raised during the discussions because of concerns that “it may not be realistic for high-debt countries, especially now after the crisis”. 

He added: “So we need to work on a debt rule that on the one hand ensures a reduction of public debt and on the other hand is realistic for all member states.”

Another reform discussed on Saturday was the idea of stripping out green investments from deficit rules, in a bid to ease the barriers in the way of massive public spending programmes involved in the climate transition. 

Paolo Gentiloni, the EU economics commissioner, has repeatedly warned that the EU cannot not afford to repeat the aftermath of the last crisis, when public investment slumped, given a need to drive up spending on the climate transition in the coming decade. 

A paper presented by the Bruegel think-tank said that achieving EU climate goals would require an increase in total green investment of about 2 percentage points of GDP annually, of which public investment will have to amount to between 0.5 per cent and 1 per cent of GDP.

Bruno Le Maire, the French finance minister, said on Friday that given the “huge climate challenge” the EU faced it was worth looking at the idea of exempting green investments from deficit calculations in the EU’s fiscal rules.

Dombrovskis confirmed the idea of a “golden rule” on investment would also be part of the commission consultation. 

However frugal ministers are deeply sceptical about the idea, and they are beginning to marshal their arguments against far-reaching reforms to the Stability and Growth Pact.

In a paper circulated ahead of the meetings outside Ljubljana, eight ministers said they were willing to discuss “improvements” to the rules, but they made it clear their focus was on simplifying the rules and making them more transparent. 

Gernot Blümel, the Austrian finance minister, who organised the joint paper, told the Financial Times that he was open to discussions on changes, but he questioned the motivations of countries advocating exemptions for green spending, saying he feared they were using the proposal as “an excuse for not coping with rules that are necessary and reasonable.” 

Dombrovskis stressed on Saturday that discussions at this stage about possible changes were still conceptual and that it was too early to say whether any legislative change would be needed. It would be critical to build a political consensus around any possible reforms, he added. 

Earlier in the crisis some policymakers argued that the Stability and Growth Pact should be rewritten before the EU reimposes the rules, but officials meeting on Saturday said it is not realistic to expect new legislation to be in place that soon given the complexity of the looming debate. 

As such, the commission may need to offer new guidance next year on how it wishes to impose the unchanged rules in a way that paves the way to a gradual reduction in budgetary support rather than a sudden clampdown.

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