Stability Pact: How Europe’s Debt Will Go From Here – Economy

The EU Commission’s discussion paper is only 19 pages long and does not contain any specific proposals. Nevertheless, it will spark a heated debate, after all, it is about the constantly contested Stability and Growth Pact, the rules for sound financial management in the EU. For some governments the regulations are too harsh, for some too lax. How the new federal government will position itself remains to be seen. Despite this difficult starting position, the commission started on Tuesday a reform process: She published the paper and is now gathering opinions from governments, parliaments and associations – citizens can too online their views communicate.

In the coming year, presumably after the French presidential elections, the authority intends to propose changes. The ideas that have already been put forward by governments and economists include, for example, treating green investments more leniently when calculating budget deficits or specifying individual paths for states to deal with the mountains of debt.

The Commission started a debate on the future of the pact in February 2020, but broke it off immediately because of the pandemic. At the same time, the authority continued the stability pact for the first time so that member states can incur unlimited debts in the corona crisis. In the course of the coming year, however, all 27 EU countries will have returned to their pre-crisis economic output. Therefore, the set of rules will probably come into force again at the beginning of 2023. Then governments would have to stick to the limit for the annual budget deficit of three percent of economic output and aim for a debt ratio of 60 percent of economic output.

After the pandemic, only seven of the 19 euro countries will fall below this 60 percent. Four others – Portugal, Spain, France and Belgium – will have debt levels about twice as high as allowed on the books; Greece and Italy are even at 202 and 157 percent. So far, the Stability Pact stipulates that these sinners should return to 60 percent within 20 years. Italy would have to reduce its debt level by four to five percentage points every year, which is completely illusory. Therefore, this requirement will certainly be a topic in the upcoming debate, said Valdis Dombrovskis, Commission Vice-President responsible for economics, in an interview with the SZ and international media. What is needed is “a moderate and growth-friendly path” to reducing debt.

“The rules are too complicated”

The former Latvian Prime Minister makes it clear, however, that the Commission will probably not suggest raising the 60 percent and three percent targets. For this, the EU treaties would have to be laboriously changed, and he does not expect any proposal in this direction: “You can adjust a lot of the rules without changing the treaty.” The Commission then has the choice of proposing legislative changes or just adapting its own application rules for the Stability Pact. A legislative process would take longer because of the usual involvement of the EU Parliament and the Council of Ministers. Dombrovskis warns that in that case it would be “a challenge” to complete the reform by early 2023, when the pact is supposed to come back into force.

The Christian Democratic Commission Vice-President also calls for the pact to be simplified and for the assessment of budgetary policy to use parameters that are easier to observe: for example, the level of government spending instead of economic concepts such as the output gap. “The rules are too complicated,” he says – and this assessment is likely to meet with broad approval among EU governments.

In addition, in its debate paper, the Commission raises the question of whether it is not possible to learn something from the Stability Pact, as the Member States and the Commission do Reconstruction program work together. The majority of the billions from the Corona aid pot will be distributed via this new EU program. Governments commit to reforms and investments here, and the agency only releases the grant tranches if these projects have reached certain milestones.

Scholz thinks changes are unnecessary, his party sees it differently

The idea of ​​leaving investments in climate protection outside the calculation of budget deficits is highly controversial. The Brussels think tank Bruegel has that in one study that was recently presented at a meeting of EU finance ministers. France is one of the supporters, and Austria is one of the opponents of the new exceptions. The Viennese Finance Minister Gernot Blümel has written a position paper with seven counterparts from EU countries for whom budget discipline is traditionally important, in which they warn against a weakening of the pact.

The Commission’s discussion paper puts the necessary investments by the state and companies in climate protection and digitization at 650 billion euros annually until 2030. Dombrovskis says that it is “a matter of squaring the circle: How can governments make the necessary investments and, at the same time, gradually reduce their debts? ” He warns to be “pragmatic and realistic” in the debate, because in the end a consensus among all EU governments is necessary.

How Berlin will position itself is unclear. As finance minister, Olaf Scholz has always emphasized that the rules do not need any reforms, as they have proven to be sufficiently flexible during the pandemic – thanks to the possibility of suspension. Of course, there is something else in the election manifesto of his SPD. There you can read that the regulations must be further developed “into a sustainability pact”; Instead of austerity programs, investments should now be the order of the day. The Greens are asking for something similar. The FDP, however, warns against a softening.

That Exploratory paper, with which the SPD, FDP and the Greens are preparing their coalition negotiations, is attempting the balancing act: the pact has proven its flexibility, they say, and on its basis the government wants to “maintain debt sustainability and ensure sustainable and climate-friendly investments”. What this means in concrete terms will soon have to be shown – in the arduous debates that are pending in Brussels.

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