EU Finance Ministers arrived in Kranj (Slovenia) on Friday with all the artillery ready for the battle to reform the Stability and Growth Pact. Under the good tone of the statements, notices and red lines are already guessed, some put in writing, such as those of the group of ‘hawks’ warning against any reform that cracks fiscal stability.
The shock is such that the 27 partners disagree not only on the elements to be modified, or the ambition of the reforms, but also on the calendar. Between them, although closer to those who ask for softer adjustments and more space for investment, the Commission suggested yesterday that it will still give some oxygen to the partners from 2023, when the Stability Pact will be reactivated.
The herculean effort made by member states to deal with the covid-19 pandemic skyrocketed public debt to unprecedented levels in the EU, hovering around 95% of GDP this year.
This figure is well above the limit of 60% of GDP established in the Stability Pact, now suspended to allow the additional spending that European economies have needed in the face of the pandemic. The framework also states that public deficits will remain below 3% of GDP.
Although the European economy is expected to reach its pre-crisis level later this year, the ECB has already warned that the speed of the recovery will depend on how the pandemic unfolds.
In this context, the EU finance ministers have begun to discuss this weekend how to improve fiscal rules, a decision that will potentially determine the severity of the fiscal adjustments and the tax increases that they will have to adopt to control their public finances.
The pro-fiscal stability group, composed mainly of Member States from the North, and the countries of the South, in favor of a framework that makes room for investment, agree that the rules should be simplified, after years of amendments and reinterpretations that have complicated your application.
But both blocs disagree on whether the rules should leave more room for spending in some priority areas, such as green policies.
In addition, countries such as Spain and France, and also the European Commission, argue that the review should relax efforts to reduce the high levels of public debt, since the current methodology would force the approval of draconian austerity cuts in the economies affected by the pandemic. .
“We will need a debt reduction path that is realistic for all Member States. We need to balance fiscal sustainability with the need to support economic recovery,” said the Vice President of the European Commission, Valdis Dombrovskis, on his arrival at the meeting. of ministers.
Ambition and speed
Countries calling for more ambitious improvements to the fiscal framework also want the new rules to be in place before the Stability Pact is reinstated, which is set to happen in early 2023.
But the far-reaching changes they advocate could take at least two years, as they would require the approval of the Council and the European Parliament.
For that reason, the Commissioner for the Economy, Paolo Gentiloni, suggested that the Commission could come up with a new interpretation of the current rules next year as a quick fix.
“We can find instruments, if it is not possible to conclude this transformation [of fiscal rules] before the end of next year,” Gentiloni said in Kranj.
The new interpretation of the Pact Commission would take into account the impact of the pandemic on national economies, so it would probably soften the pace of adjustments by readjusting the application of the current methodology.
The proposal would arrive around spring next year, in time for the preparation of Member States’ tax plans for 2023.
Community sources commented to elEconomista that “it is clear that a legislative proposal would not be in force in January 2023, even if it is presented at the end of this year, so we would have to clarify how we are going to interpret the current regulations.”
A second EU source did not exclude that the Commission could propose more substantial changes to the tax rules in a legislative proposal, in parallel with the new interpretation.
The last reinterpretation of the Stability Pact came in 2015, and it was also born from the attempt to give more wings to investment, strangled by excess austerity after the last crisis.
The solution will depend on the results of the public consultation that the Commission will launch in the coming weeks, probably in early October, and on discussions with the Member States this autumn to try to narrow the differences around the reform.
Gentiloni acknowledged that “we know there is a need to build consensus.”
Member States disagree not only on how far the changes should go, but also on how quickly they should occur.
A group of eight member states, including Austria, the Netherlands and the Nordic partners, indicated in a letter shared with ministers prior to Ecofin that “the debate on improving the current economic governance framework is time consuming and should be based on wide consultations of the Commission “. “Quality is more important than speed”, they add in the letter.
However, the Minister of Economy, Nadia Calviño, defended that the reform of the fiscal regulations should be ready “before we get out of this exceptional situation”, referring to the suspension of the Stability Pact.
The group of Northern countries opened up in their letter to “discuss the simplifications and adaptations [of the rules] that favor a consistent, transparent and better application, as well as compliance with the rules, but only if the new proposals do not compromise the fiscal sustainability “.
But it is insufficient in Madrid, Paris or Rome. French Finance Minister Bruno Le Maire argued that investments to reduce the carbon footprint of European economies should receive special treatment in the eyes of deficit and debt limits.
The results of the German elections on September 26 will influence the speed of the adjustments and the additional room for spending in the rest of the partners. German Finance Minister Olaf Scholz, turned into the new front-runner to succeed Angela Merkel, is not in favor of big changes to the Stability Pact, as he considers that the current rules allow enough flexibility, as seen during the pandemic. But the Greens advocate easing debt thresholds to invest in green priorities.
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