EU to propose more flexible spending rules

BRUSSELS — The European Commission will propose reforms to EU fiscal rules on Wednesday, hoping to strike a new balance between allowing members to invest to beat the slowdown while bolstering scrutiny of public accounts.

EU Economy Commissioner Paolo Gentiloni has said that now is the time to act on the issue.

The EU's Stability and Growth Pact seeks to put a lid on how much the bloc's member states can borrow, but was suspended in early 2020 to prevent the European economy crumbling under the COVID pandemic.

Rather than see the EU slip into a historic recession, Brussels allowed deficits to pile up.

But now the storm has passed and — despite added pressures on Europe from Russia's war in Ukraine — the pact is due to be reactivated late 2023.

A 25-year-old pact 

The stability pact was adopted by the EU countries belonging to its eurozone in 1997, ahead of the single currency coming into being two years later.

It responded to German concerns that, without it, some EU countries might pursue loose fiscal policies, weighing on all euro-using nations.

The basic constraints of the pact were that eurozone countries should not allow their public deficit to go above three percent of GDP, and debt would stay below 60 per cent of GDP.

If those ceilings were breached, the pact would trigger deficit-reining procedures that theoretically could have led to massive fines.

But those sanctions were never applied. Part of the worry was that they could drag down an already struggling EU country's finances, worsening its situation.

The eurozone crisis of 2008 — when Greece teetered at the exit door — also taught some tough lessons.

To bring back fiscal responsibility, it was decided that wayward countries should set out a plan to the European Commission on how it would bring debt back within the agreed lanes.

Any debt level above 60 per cent was to be reduced by one twentieth each year, but that measure too was considered unworkable as it could impose destructive austerity on indebted countries.

The pact also limited the "structural" deficit — taking into account cyclical corrections — to 0.5 per cent of the amount of debt exceeding the 60 per cent ceiling.

Any amount beyond that limit needed to be reduced by 0.5 percentage points per year.

Why a reform? 

Broadly, there are two camps in the EU.

One, termed the "frugals" and de facto led by Germany, believes the stability pact hasn't been applied strictly enough.

The other, including indebted southern EU countries such as Italy, whose debt is over 150 per cent of GDP, see the pact's straitjacket as too tight.

They think it penalises public investment at a time that European countries need to spend massive amounts to mitigate climate change, transition to a more digital future and rearm amid the Russian threat.

"These two sides which demand, on one hand, automatic rules, and on the other, more flexibility, are defining the outlines of the expected reform," said Andreas Eisl, a researcher at the Jacques Delors Institute.

Both camps criticise the current rules.

The new framework will be designed to be simpler and easier to put into action, with Gentiloni arguing that should aim to guarantee both "sustainable debt and durable growth".

The main proposal is to make EU countries sign on to a medium-term plan calculated on spending, rather than on debt levels.

That goal would be easier to scrutinise, while giving countries more room to manoeuvre on investment.

Brussels, though, would wield both carrot and stick. Respecting the new rules would unlock the possibility for adjustment over a longer term, while violations would usher in more severe limits.

Next steps 

The commission's announcement will present ideas to be discussed in early December when EU finance ministers meet.

The EU executive hopes they agree on an overhaul which would then be approved by a summit of EU leaders, to be followed by European legislation next year that should be adopted within two years.

If that timetable holds, Brussels should be in a position from 2024 to interpret existing rules in light of the coming reform.

But the process looks tricky.

"It's easy to agree principles," but the devil will be in the very technical details "which will determine just how constraining the rules will be", Eisl said.