EU Making Progress onMore Flexible Enforcement of Fiscal Rules

(Bloomberg) -- The European Union is finalizing a blueprint to overcome longstanding splits and revise its debt-adjustment rules as countries are under pressure to rein in spending while also investing in defense and clean tech.

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Spain, which is currently holding the EU’s rotating presidency, is expected to propose a new “landing zone” document to the bloc’s finance ministers on Thursday. It would include the progress made over the past weeks as the basis to prepare the legal proposal for approval at their next formal meeting in December, an EU diplomat said.

The bloc has been discussing for years a reform of the Stability and Growth Pact, the rules setting debt and deficit thresholds of 60% of gross domestic product and 3% of GDP respectively for member states, suspended since the Covid crisis to address the extra costs of the pandemic and the economic fallout of the war against Ukraine and the energy crisis.

The review aims to balance sound public finances with enough margin to invest in green, digital or defense.

The European Commission, the EU’s executive arm, proposed last April giving more flexibility to member states to decide their debt-adjustment paths while reinforcing the control of the agreed fiscal targets.

But progress has proven difficult as a group of countries led by Germany is wary of giving too much discretion to some governments that have struggled to control their public spending in the past. Berlin’s desire for strict debt-reducing benchmarks for all has been criticized for not making economic sense by a large group of countries and EU officials as they could aggravate economic contractions.

Efforts to bridge the differences between Germany and countries calling for more space for investments, including France and Italy, have failed to make any breakthrough to date. That postponed the draft legal text until December, while some senior EU officials feared that the agreement could not come by the end of the year target.

Failure to conclude the review on time would lead to reinstating the existing fiscal rules early next year, forcing countries to implement severe adjustments and sending a worrying signal to markets about the bloc’s failure to reach a consensus on its economic and fiscal plans.

Read more: Why New Euro Budget Rules Are Getting Ministers Riled: QuickTake

Negotiators are however hopeful about locking in the progress made this week, the EU diplomat said, who is not authorized to speak on the record because the discussions are private.

Member states are converging on how to balance fiscal consolidation and investments, including options to ensure that public debt is sustainable and can absorb economic shocks, as Berlin demands. Member states could be requested to make additional adjustments to create fiscal buffers during good times, the EU diplomat said.

A discussion on common debt quantitative benchmarks or whether to exclude loans provided by EU’s Covid recovery from debt calculus still remains open, the diplomat said.

In addition, negotiators are progressing on clarifying how the reforms and investments included in their Covid recovery plans could help expand the deadline to adjust the public finances from four to seven years. Capitals would not need to submit new plans and the commission could take into account the commitments already made under their recovery plans, the EU diplomat said.

--With assistance from Lyubov Pronina.

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