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Brussels is preparing to reject a German push for member states to be required to meet annual debt-reduction targets, as the European Commission prepares a sweeping overhaul of the EU’s budget rules.
Draft legislation set to be unveiled by the European Commission on Wednesday will require member states to lower their public debt burdens by the end of a four-year timespan — a stricter requirement than Brussels initially proposed. But the rules will not meet demands from Germany’s finance minister Christian Lindner, who has been pushing for a harsher budget regime.
The new draft legislation being finalised within the commission would usher in far-reaching reforms to the EU’s labyrinthine Stability and Growth Pact, giving individual states greater ownership of their individual debt-reduction plans. Fiscally conservative states, led by Germany, have been pushing for tighter minimum debt-reduction standards, as they fear the new regime will be too lenient.
The pact has been suspended since the early months of the Covid-19 economic crisis in 2020. EU policymakers say it will be reimposed next year, pushing for the new rules to be endorsed this year in a bid to foster public investment in priorities such as the green transition while avoiding overly draconian debt-reduction plans.
The commission wants to engage in negotiations with member states on their debt-reduction plans based on a so-called debt sustainability analysis, embarking on a spending path initially set over a four-year timespan, which could be extended to seven years.
The draft legislation requires member states to ensure their debt-to-GDP ratios are lower at the end of the initial four-year timeframe compared with the most recent reading. In addition, member states would need to keep net expenditure growth below their medium-term economic growth, and they would not be permitted to backload their fiscal reforms. Countries with excessive deficits will still have to reduce them by 0.5 per cent of GDP a year.
The overall package is tighter than was initially proposed by the commission late last year when it first set out a blueprint for its reforms. But it still falls short of the annual public debt-reduction requirements Germany has been seeking. Berlin has proposed that debt-to-GDP ratios of heavily indebted countries should fall by 1 percentage point a year. For countries with less onerous debts, the minimum requirement could be a 0.5 percentage point a year.
The commission fears that debt-reduction requirements as strict as that would damage economic growth, a view shared by less hawkish member states. Brussels has already said it will ditch a requirement under the current rules that says member states whose debt surpasses 60 per cent of GDP have to plan for a 1/20th annual reduction of that burden.
The commission legislation will need to be thrashed out by the Council of the EU and the parliament, a process that will not be straightforward.
Lindner has repeatedly warned that the commission’s proposal for bespoke arrangements for each capital leaves too much wiggle-room, calling this week in a Financial Times article for a “functioning system of fiscal rules that leads to equal treatment of all member states”.
In his article, Lindner warned that he would only support reforms that represent “significant improvements” to the framework, failing which he would advocate leaving the regime unchanged.
Such an outcome would represent a defeat for the commission and other member states, including Italy and France, that argue the current regime is over-complex while offering too little scope for growth-enhancing investments.
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