EU reforms of fiscal rules hit resistance among big capitals

Brussels faced objections from the EU’s three largest 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 to address high public debt in the EU, saying “significant modifications” were needed to make the rules strong enough. binding and transparent.

France took the opposite 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 bill proposes sweeping changes to the way the body oversees countries’ budget plans, creating a simpler framework with more room for public investment, while trying to contain fiscal waste.

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

The draft, which will now need to be discussed by the Council of the European Union and parliament, comes after an increase in the debt burden around the world during the Covid-19 crisis. Demands to combat climate change and the war in Ukraine now place additional demands on public 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 combined with credible reforms. The commission added additional “safeguards” to its regime in an attempt to reassure Berlin that there would be minimum standards that member states must meet.

However, Lindner, who has long been skeptical of the commission’s push for tailored debt relief deals, cautioned that the safeguards in the proposals were not strong enough. The increased flexibility represented a shift from Berlin’s desire for a common deal covering the entire region to “bilateralized” fiscal rules.

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

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

Italy’s Finance Minister Giancarlo Giorgetti expressed disappointment that Brussels has not heeded Rome’s call to exclude investment spending, especially those related to the Covid recovery plan and the green transition, from the calculation of targets. deficit that countries would have to meet.

Paris believes the commission has gone too far to accommodate Berlin’s demands. French Finance Minister Bruno Le Maire said some parts of the plan “need to be reworked” and said Paris “opposes uniform automatic deficit and debt reduction rules”, arguing they are ineffective and widely criticized for academics.

The bill requires that countries with budget deficits above the Stability and Growth Pact threshold of 3 percent will have to push for a minimum fiscal adjustment of 0.5 percent of GDP a year, even if they are not yet formally in a so-called excess. deficit procedure.

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

The commission’s enforcement regime would be strengthened by reducing the amount of fines for countries that break the rules, making them more likely to be imposed.

Other safeguards would ensure that spending grows at a rate slower than economic growth over the medium term, and that fiscal reforms are not delayed until the end of a multi-year planning period.

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