Commission proposes changes to EU’s debt rules
The European Commission has proposed changes to the EU’s onerous debt rules that would allow member states to negotiate their own debt reduction path, using the carrot of more flexibility if governments introduce reforms and investment.
The Irish Government is understood to be supportive of the measures.
The new measures will form part of the eagerly awaited overhaul of the EU’s fiscal and debt rules.
Today’s communication is seen as an acknowledgement that the austerity and debt rules associated with the financial and euro crises of ten years ago were no longer fit for purpose.
At the same time, average debt-to-GDP ratios have increased due to wholesale borrowing during the pandemic, meaning it will be almost impossible for member states to reduce their debt burdens according to the strictures of the existing rulebook.
The Commission proposal kicks off a process to reform the so-called Stability and Growth Pact (SGP), which aims to manage member states’ debt and deficit situations.
Brussels wants a more tailored response to financial crises, as opposed to the one-size-fits-all approach which characterised the management of the fiscal shocks of 2009-2013.
The rules have been largely suspended in the past two years to allow EU countries to cope with the dramatic effect of the Covid pandemic and Russia’s invasion of Ukraine.
There is an awareness that the rules must be reapplied, but they need reformed in the meantime.
National capitals have complained that the existing rules have been highly technical and difficult to follow, and that the Commission has not always enforced them.
The overhaul of the SGP comes following a consultation period involving national capitals, EU institutions, citizens groups and academics.
Under current rules, euro zone countries must cut debt each year by one twentieth of the excess above 60% of GDP, a target seen as near impossible for highly indebted countries like Italy and Greece.
Today’s proposals would mean each country agreeing its own four-year debt reduction path with Brussels, while getting sign off from other EU finance ministers as the process unfolds.
The four years could be extended to seven, if the extra time was justified by investment and reforms.
Officials say that to balance the carrot of a more flexible debt reduction path, there would be the stick of limits to net, or primary, expenditure, meaning spending before interest on debt is taken into account.
The more indebted a country is, the tougher the primary expenditure limit would be.
Governments will still have to keep budget deficits below 3% of GDP as now, and there would still be disciplinary steps if they exceed that ceiling, with fines for breaches that are smaller, but more easily applied.
Officials say the existing rules contain little in terms of incentives for reform and investment and lack overall ownership by member states. They also have suffered from poor enforcement.
Today’s communication, which is not yet a legislative proposal, would have “more ownership and is more realistic,” one official said.
It would find “the right balance between debt sustainability and sustainable growth as these are two sides of the same coin.”
The process to reform the SGP is likely to run into 2024, with a robust battle expected between the so-called northern “frugals” – namely the Netherlands, Germany, Austria and Sweden – and the southern countries led by Italy and France.
Frugal countries have long complained that the rules were not enforced by the Commission in that fines were not imposed when countries like France or Spain breached them.
Before the pandemic, average EU debt-to-GDP was around 75%. Today it stands closer to 90%, with six member states having a ratio of over 100%.
Ireland’s debt to GDP level stands at below 60%.
However, because of the impact of the large multinational sector, economists say the GNI* measure – which strips out the multinationals factor – is a more accurate picture of the country’s indebtedness. In Ireland’s case this is just under 100%.