26 April 2023

EURACTIV: Commission inches towards Berlin in EU debt rules proposal

The Commission’s legislative proposal follows a discussion among EU countries after the Commission had presented an initial set of ideas on how to reform the EU’s fiscal rules (“Stability and Growth Pact”) in November 2022.

The reform aims to make debt-reduction programmes more realistically attainable and improve their enforcement.

“For 25 years, the Stability and Growth Pact has provided common rules, and it was essential to underpin the Economic and Monetary Union,” Paolo Gentiloni, the EU commissioner for the economy, said on Wednesday.

“Yet, the Pact’s shortcomings have also been all too evident”, Gentiloni added. Of note, public debt levels, which normally should be limited to 60% of GDP under the original rules, have reached an average of 90% of GDP across the bloc.

Investment levels, which are expected to spur economic growth, have continuously gone down since the 2011 euro crisis, while economic growth performance remained particularly low over the past two decades, Gentiloni said.

As such, the current debt rules were seen by many as fuelling low economic performance rather than boosting it through relevant and tailored debt-reduction programmes.

What the reform entails

Rather than the current one-size-fits-all approach, the Commission now proposes to give highly-indebted member states more time to bring their debt levels closer to the 60% of GDP threshold.

The 3% budget deficit rule, enshrined in the Treaties, remains fully in place.

Specifically, the reform does away with the historic “1/20 rule”, which stipulated a highly-indebted member states would have to reduce 1/20th of the difference between the 60% and the country’s actual debt ratio every year, a rule which was found to dampen economic growth altogether.

Instead, member states would now follow country-specific “medium-term structural plans”.

These will be negotiated between the Commission and the member state in question, on the basis of a country-specific Commission proposal, known in the jargon as a ‘technical trajectory’.

These announcements, initially made back in November in a Commission Communication, have been met critically by some member states, most notably Germany, for which this ‘bilateral’ approach might create a risk that countries do not sufficiently reduce their public debt level, with the Greek debt crisis still weighing on many minds.

German Finance Minister Christian Lindner has therefore repeatedly called for “common safeguards”, which in his view should include a minimum annual debt reduction target that applies to all countries.

Furthermore, Germany was critical of the fact that the initial Commission proposal would have allowed for an adjustment period of four to seven years, in which even highly indebted countries would not have to reduce their public debt levels.

Instead, they would have only been obliged to be on a “plausibly declining path” towards lower debt levels from the end of the period onwards...

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