EU agrees on principles of new debt rules, but many details still open

© Reuters. FILE PHOTO: European flags fly outside the European Commission headquarters in Brussels, Belgium March 13, 2023. REUTERS/Yves Herman

By Jan Strupczewski

BRUSSELS (Reuters) - European Union finance ministers agreed on Tuesday on broad principles of a reform of Europe's fiscal rules to better accommodate investment and give more flexibility to cut debt for high-debt countries, but crucial details remain to be decided.

Conclusions of a meeting of the EU's 27 finance ministers on Tuesday showed EU countries support much of the European Commission's proposal presented last November, but its practical implementation is still a challenge.

"Today's conclusions reflect the Commission's aim for a simpler system, greater country ownership and more latitude for debt reduction – combined with stronger enforcement," Commission Vice Presidency Valdis Dombrovskis told a news conference.

"There is still work to do on details and to reach convergence on some remaining open issues," he said, adding the aim was to finish the reform this year.

The rules, created in 1997 and already revised three times since, are facing a new challenge after government support for the economy during the COVID-19 pandemic and the 2022 cost of living crisis boosted public debt, while efforts to stop climate change require huge public investment.

The ministers agreed the EU's existing limit of 3% of GDP for budget deficits and 60% of GDP for debt would be unchanged.

But governments with debt above the limit will negotiate with the Commission individual debt reduction paths linked to reforms and investments, departing from a one-size-fits-all rule of annual debt cuts of 1/20th of the excess above 60% of GDP.

Since many EU countries have debt well above the EU limit, they will get between four and seven years to put it on a downward path that would be negotiated with the Commission on the basis of a Commission debt sustainability analysis.

Debt is to gradually fall through limits set on annual net primary expenditure - spending that excludes one-off revenues, interest or outlays on cyclical unemployment - which the government has under direct control.

Finance ministers say this is an improvement on the unobservable and revision-prone structural deficit which is the focus now.

A government can negotiate more time to cut debt if it promises reforms and investment that boost growth or resilience, strengthen public finances or addresses EU strategic priorities, like the green and digital transition or defence capabilities.

In case of shocks to the economy that are outside a government's power, there would be an "escape clause" allowing a temporary deviation from the agreed debt cutting deal, though it would have to be approved by other governments.

In an acknowledgment that apart from conducting sound fiscal policy, governments need to win elections, the ministers agreed in their conclusions that the new rules must "allow the democratic process ...to shape their economic policies."

"Therefore, all plans could be aligned, upon request, with the national electoral cycle, revised with the accession of new governments, and updated in objective circumstances, while upholding the ambition of the fiscal adjustment," they agreed.

TRICKY DETAILS

There remain a number of points on which the ministers disagree. Chief among them is the methodology of the Commission's debt sustainability analysis on which so much of the debt cutting deal is to depend and which would limit a government's borrowing and spending power.

Equally controversial is the issue of whether there should be any numerical benchmarks for debt reduction that would be common to all countries even if they negotiate individual paths, and if yes, what they should be.

This is a point, especially sensitive for Germany, which insists there should be some common quantitative rules on debt despite the increased flexibility. "There is still a lot of work to be done, for Germany to agree," German Finance Minister Christian Lindner said after the ministers' meeting.

Other open questions include the new framework's requirements for those countries which do not have any major debt problems, how to define the expenditure aggregate, when exactly a government should get more time for debt reduction and how to enforce the agreed plans.

Once finance ministers agree on the broad principles on Tuesday and EU leaders back them at their summit on March 23-24, the Commission will start drafting concrete proposals on the still open questions.