Brussels wants to give EU capitals extra time to curb their debts and create space for public investment as part of a major overhaul of the EU’s deficit rules.
The European Commission will table a proposal at the end of October to reform the Stability and Growth Pact, under which it would work out multiyear, country-specific plans with capitals for getting their debt burdens under control, EU officials said.
The plans, which are still being discussed between the commission and capitals and have yet to be finalised, would simplify the EU’s hugely complex fiscal rules while tightening enforcement.
“The idea is for member states to have greater ownership of their debt reduction plans, which they could fine-tune themselves more than they can do today,” said an EU official. “But once countries agree their plans with both commission and council, they would need to be delivered and would be easier to enforce.”
The official added: “So it’s about balancing member state ownership with tighter enforcement.”
The commission is under pressure to settle on a new approach before full enforcement of the Stability and Growth Pact resumes in 2024 following a suspension triggered in 2020 by the pandemic. The proposals come as member states face mounting fiscal burdens as they spend hundreds of billions of euros sheltering businesses and households from the energy crisis, while boosting spending on energy and defence.
Under the new blueprint, the commission would propose a four- or five-year plan to an EU member state to get its public debt burden on a credible, downward trajectory, officials said.
The capital could either accept this plan or table a counterproposal for between six to eight years, which would need to be justified by the need for investments in key priority areas such as green energy or defence. The national fiscal plan would need to pass a debt sustainability analysis and get approved by the commission and EU council.
The new regime would ditch an EU rule that requires a 1/20th per annum reduction in debt ratios by member states with debt above the EU’s 60 per cent of gross domestic product ceiling.
That requirement is widely recognised as being unrealistic given public debt ratios have shot up dramatically since the pandemic eased.
The new rules would, however, retain the EU’s key reference values of a 3 per cent of GDP public deficit limit and 60 per cent of GDP debt ratio, both of which are mentioned in the EU treaty. The commission wants to downgrade the use of hard-to-measure variables that attempt to correct for the economic cycle, focusing instead on a simple gauge of public spending.
After agreeing a debt plan with a member state, there would be annual progress checks and the threat of enforcement procedures.
In their multiyear plans, capitals would commit to a series of reforms aimed at strengthening the economy, partly drawing on the recovery blueprints they agreed as part of the €800bn NextGenerationEU programme.
The proposals will need to win acceptance in EU capitals and may need to be enacted in legislation. Elements could face a frosty reception in hawkish member states such as Germany. Berlin is suspicious of allowing bilateral deals between capitals and the commission. Clear upfront minimum EU standards for a plan may allay these concerns.
An EU official said: “There are two sides to the coin — more gradual debt reduction and space for public investment on one hand, coupled with stronger enforcement on the other.”
A commission spokesperson said its objectives were to “achieve a broad-based consensus on our common fiscal framework”. The spokesperson referred to commission president Ursula von der Leyen’s recent state of the union speech, in which she said the rules should allow for strategic investment, while safeguarding fiscal sustainability.
Paolo Gentiloni, EU economics commissioner, told reporters on Friday that there was now a “common awareness” that the 1/20th rule was overly rigid and needed to be changed. “In addition to the gradual reduction of debt, we have to make room for investment growth, especially investment in what we consider to be common priorities for the union,” he said. “Finally we must try to make this package of rules simpler.”