More leeway, but also more hardness – the EU Commission is proposing this deal to the member states in the rules for sound financial management. The authority presented the long-awaited reform proposals for the Stability and Growth Pact in Brussels on Wednesday. Accordingly, highly indebted euro countries such as Greece and Italy should be given more time and flexibility to reduce their liabilities. In return, penalties should be imposed more quickly in the event of violations. Commission Vice-President Valdis Dombrovskis saidthe concept “will enable us to work together to reduce debt, strengthen our economies and lay the basis for our future prosperity and stability”.
The proposals only came in the form of a position paper, and draft laws are to follow later, probably in March. Before that, the Commission wants to explore with the governments whether the concept is capable of consensus. Federal Finance Minister Christian Lindner, for example, is one of those critics who warn against giving the Commission too much leeway if it agrees individual paths for debt reduction with individual governments in the future. This is what the concept envisages as a substitute for unrealistic and therefore never enforced regulations that have demanded completely utopian budget surpluses from heavily indebted countries like Greece. However, Lindner said on Wednesday that uniform rules must apply in the monetary union: “This must be achieved consistently.” Relaxing regulations or more leeway would not help. “That would not be balanced,” said the FDP chairman.
Time is of the essence: the rules are scheduled to come into force at the beginning of 2024
Once the Commission has submitted a draft law, the Council of Ministers, i.e. the body of the member states, and the European Parliament have to deal with it. Time is of the essence: Two and a half years ago, at the beginning of the pandemic, the Commission decided not to apply the Stability Pact for the time being so that governments can better support companies and citizens. But the rules should come into force again at the beginning of 2024 – and in an adapted form. However, passing the reform law in time will be difficult.
The was introduced stability pact 1997; it is intended to prevent new debt crises. To this end, he prescribes upper limits for the annual budget deficit of three percent of economic output and a target for total government debt of 60 percent of economic output. In the event of violations, the Commission initiates proceedings; there are even threats of fines, although the authority has never imposed penalties. The new concept would stick to the two target levels of three and 60 percent. However, according to Commission forecasts, only eight of the 19 euro countries will fall below the 60 percent limit in 2023.
According to the proposals, if governments are above this, the Commission would give them four years to embark on a budgetary course that will permanently reduce the mountain of debt. If governments promise growth-enhancing reforms and investments, they can be given three more years to change course. The new rules thus offer stronger incentives for state investments. A weakness of the previous Stability Pact is that governments have often cut back on investments to meet budgetary requirements and less so on current expenses such as salaries and pensions.
“The Commission needs real instruments of torture.”
The proposals are also intended to improve enforcement of the rules. If highly indebted governments violate the budget agreements, the commission should automatically start criminal proceedings. The authority can withhold EU funding and impose fines more easily than before.
However, there is already a lot of criticism of the concept in the European Parliament. “We are heading towards the next sovereign debt crisis at high speed,” says CSU MP Markus Ferber. “What we don’t need now is more flexibility in debt rules.” In addition, the economic policy spokesman for the Christian Democratic EPP group would like to see harsher penalties: “The Commission needs real instruments of torture, which it is willing to use.”
The FDP MP Moritz Körner considers the ideas to be “a solid basis for negotiation”, but with “a lot of room for improvement”. Just like his fellow party member Lindner, he is skeptical about the individual agreement on debt reduction paths: “The more the reduction paths are individualized and the more freedom of decision the Commission is granted in punishing deficits, the less successful the debt reduction will be,” says the budgetary spokesman the FDP in the European Parliament. “The past has proven that.”
Rasmus Andresen, head of the German Greens in the EU Parliament, would have preferred more extensive relaxation exercises. “The Commission should have gone further and sent a clear signal for public investment,” he says. He demands that the stability pact must in future provide for exceptions for state investments in climate and environmental protection. There is no doubt that difficult debates are still ahead of the reform.