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Can Spain close urgent EU fiscal reforms? Don’t bank on it

Can Spain close urgent EU fiscal reforms? Don’t bank on it

by host

Spanish negotiators will feel pressure to make progress on all files before EU election next June, which will throw the legislative agenda into disarray. But one file stands out for its urgency: If new fiscal rules aren’t agreed soon, an outdated rulebook suspended during the pandemic will come back into force with little hope of compliance.

The EU’s Stability and Growth Pact was put on ice in 2020 to allow governments to jolt their economies back to life after COVID-19. Since then, supporting Ukraine against the Russian invasion — and weathering the related surge in energy prices — has ballooned their budgets further.

The pact is due to come back into force on January 1, 2024 and it’s unlikely that new rules will be in place by then — which is why the Commission already issued provisional guidelines for 2024, trying to create a bridge between the old rules and the new ones under negotiation. If Spain can reach a deal in the EU Council by the end of the year, and lawmakers can do likewise in the European Parliament, there’s a hope that EU institutions can clinch a deal in trilateral negotiations with the Commission before the elections; but it’s a tight timeline.

There’s a broad consensus that the current rules are no longer realistic. Many countries have blasted through the 60 percent of debt-to-GDP ratio threshold and the 3 percent budget deficit limit enshrined in EU treaties. Were the pact to come back into force in its current form, much of the bloc would have no means of becoming compliant, besides a repeat of the harmful austerity policies imposed during the eurozone debt crisis.

So agreeing on an update to the new rules is necessary, but that’s not to say it will be easy. Germany and others are pushing for faster and stricter debt reduction, whereas highly indebted countries want to preserve more room for public spending.

The European Commission in April proposed to overhaul the pact. The reform moves away from one-size-fits-all numerical rules to a country-specific approach to debt reduction, giving countries more leeway to reduce excess debt in exchange for more predictable enforcement.

The key elements are replacing a requirement to reduce excess debt by 5 percent per year — known as the 1/20 rule and widely considered unrealistic — with national debt reduction plans over four years, extendable to seven if accompanied by reforms and investments. These plans would be set on the basis of a debt sustainability analysis in negotiations between the Commission and individual governments, and would need to be approved by other governments in the Council.

The idea is to give countries more “ownership” over their plans, which together with more credible sanctions should put excess debts on “a plausibly downward path.”

But this isn’t good enough for a group of countries, led by Germany, which fear that bilateral negotiations would give too much discretion to the Commission. Berlin asked for annual debt reductions of around 1 percentage point per year for highly indebted countries, and half of that for those with less worrying debt piles.

To assuage these concerns, the Commission added last-minute “safeguards” to the proposal, mandating that public debt-to-GDP ratios must be lower at the end of the plan than at the beginning, that debt cuts can’t be kicked back, and that countries with deficits above 3 percent must reduce them by 0.5 percent of GDP per year.

Germany still wasn’t satisfied. Ten other countries support its demand for “common numerical benchmarks”: Austria, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Latvia, Lithuania, Luxembourg and Slovenia. Finland and Sweden may well join that group once a government is formed in Helsinki and Sweden passes the EU presidency scepter to Spain. The Netherlands also shows support for the idea. That group would be big enough to constitute a blocking minority in the Council — and they’re ready to wield it to get their way.

“Something is going to have to give,” said one EU diplomat from this group of countries, who was granted anonymity to speak about sensitive negotiations.

On the other hand, high-debt countries, which already perceive the safeguards added by the Commission as an excessive stricture, are unlikely to readily agree to that.

“I don’t think that we need to move further and that you are going to strengthen that numerical approach and benchmarks,” said Belgium’s Finance Minister Vincent Van Peteghem at a recent POLITICO event. “It will be important that especially for high-debt countries … you have the possibility to have some … diversification among the member states.”

France has complained that the automatic deficit reduction goes against the grain of the reform, and Italy is asking for more leeway to make strategic investments.

“[We] need a new stability pact that looks very much at supporting growth,” Italy’s Prime Minister Giorgia Meloni said on June 8 after a meeting with German Chancellor Olaf Scholz.

Getting all 27 EU countries to agree by year’s end is the task facing Spain. Meanwhile, in the European Parliament, representatives of the centre-right European People’s Party and centre-left Socialists & Democrats groups are sharing the negotiating mandate, in a sign of the file’s high importance.

MEPs are aiming to reach a common position by November or December, so as to start trilateral negotiations with the Council and the Commission in the first months of next year, during the Belgian presidency. In that case, a deal ahead of the European elections will be within reach.

“You need to finish these negotiations before the end of this term,” said Van Peteghem. The alternative is bringing back the old version, and “we know that these rules will not work today.”

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