Feb 1, 2023
EU Is Poised to Miss March Goal to Agree on Reform of Debt Rules
(Bloomberg) -- The European Union risks missing a March target to agree on a reform of its debt-limit rules in the face of resistance from countries including Germany, a prospect that may force member states into abrupt and potentially painful budgetary adjustments.
Berlin is especially doubtful about the idea of highly indebted governments negotiating tailored plans with the European Commission to bring their spending under control and wants to see reliable enforcement tools in place.
The EU is reviewing the so-called Stability and Growth Pact to try to simplify the bloc’s fiscal rules and scrap certain conditions that have forced some nations to adopt draconian budgetary cuts that led to self-inflicted recessions.
The initiative also aims to free up more investment in green technologies as the EU seeks ways to counter the US’s $369 billion subsidy package under its Inflation Reduction Act, as well as competition from China.
Read more: EU Needs Funds to Counter US Energy Push: Here Are the Options
The existing rules set limits of 60% and 3% of gross domestic product respectively on countries’ debt and deficits that few nations meet. They have been suspended since the Covid pandemic engulfed the region in 2020, and some have said they need to be changed before being reinstated on Jan. 1.
The EU’s executive arm wants a broad consensus among member states before making any concrete legislative proposals to adjust them. The bloc’s finance chiefs will have a first discussion in mid-February. Governments may have to start preparing budgets for next year under the old rules if they fail to reach an agreement by March.
“To be very blunt, the proposal of the European Commission has not yet acknowledged our concerns,” German Finance Minister Christian Lindner said earlier this week after a meeting with EU Economy Commissioner Paolo Gentiloni in Berlin. “We have our doubts that the proposal of the European Commission will lead to a reliable path to debt reduction.”
Though the EU would maintain the current thresholds, the commission in November proposed some changes that would allow for tailor-made debt-reduction plans. These would be based on a country’s fiscal sustainability, as well as its intended reforms and investments.
This was considered too vague by a majority of member states, according to people familiar with the matter who spoke on condition of anonymity because the discussions were private. Particularly at issue was the methodology to be used to determine the debt sustainability of national economies, a key indicator under the new framework.
The commission circulated further details to explain its proposal, which some EU officials hoped would help unblock technical discussions and open the way for a deal in March. Berlin considers there is still a long way to go, however, making the timetable appear unrealistic, a government official said.
“We would like to keep a multilateral, rule-based approach instead of kind of bilateral negotiations between the European Commission and member states,” Lindner said.
Germany and some other member states would also have preferred it if the commission had provided a detailed legislative proposal as the basis for discussions, rather than first seeking a consensus.
Certain EU officials and diplomats in Brussels criticized Berlin’s uncompromising stance as short-sighted.
Some said Germany blocked progress toward a deal because its governing coalition was still working on a unified position. Others pointed to Lindner’s weakness at home as his business friendly Free Democratic Party has lost votes in regional elections since his party joined the government at the end of 2021.
Read more: Germany’s Debt Dilemma Tempts Finance Chief Into Bending Rules
Lindner has argued against loosening EU rules and vocally supports his country’s constitutionally enshrined debt brake. He has stressed the need to reinstate the limit on net new borrowing this year after it too was suspended during the pandemic.
Commissioner Gentiloni sounded a positive note after his meeting with Lindner, however, highlighting Germany’s commitment to discuss the proposal for the EU’s economic governance rules constructively despite having clear differences of opinion.
“For me, this is good news, and I will work to give to this good news positive development,” he said.
©2023 Bloomberg L.P.
BNN Bloomberg Picks
What happens if you mistakenly get a larger tax refund?
Is your retirement portfolio ready for what's to come?
Canadians are staring a recession in the face: David Rosenberg
Canadians' wages kept growing in February: StatsCan
Travel stocks: Three hot picks from Michael Bellisario
What mortgage owners need to know about the Bank of Canada's rate pause