The European Commission will keep its debt rules on ice next year when the EU fiscal framework is supposed to come back into force, according to a draft guidance obtained by POLITICO.
The guidance, if left unchanged, will be a big relief for France, Italy and Spain, which are among half a dozen EU countries that will emerge from the pandemic with even heavier debt. . Brussels suspended the rules in March 2020 so treasuries could prevent economic fallout from the pandemic without fear of sanctions, with plans to reintroduce the framework from January 2023.
a new message, in a nutshell from the Commission: the EU’s executive body will be lenient – provided governments get their finances under control and start trimming their debt.
The Commission plans to present its new fiscal policy guidelines to capitals in early March so they can start planning their draft budgetary plans – an exercise that Brussels also carried out last year.
The document is a nod to the difficulties of strengthening the so-called Stability and Growth Pact (SGP) in the post-pandemic world. Countries have been spending heavily to prevent mass unemployment and bankruptcies amid national lockdowns, pushing up levels of debt across Europe.
The SGP would normally cap budget deficits at 3 percent of economic output and attempt to limit public debt to 60 percent. Countries with debt levels above this threshold should reduce the difference at a rate of 5 percent per year.
But plans have long been in place to reform the rules, and proposals to change them were already expected this summer. The Commission sees no reason to fully apply the PSC’s debt rules when they could soon change anyway, the document suggests.
“Pending the outcome of the economic governance review, the Commission will not apply the debt reduction benchmark as currently worded,” the draft says. “However, the Commission will continue to monitor the evolution of the debt in accordance with the requirements of the Treaty.”
The Commission’s delicate balancing act is complicated by rising energy prices and the rapid spread of Omicron. The double whammy acted as a drag on growth for the bloc to the point that the International Monetary Fund recently downgraded its forecast for eurozone growth this year by 0.4 percentage points to 3.9%.
Paolo Gentiloni, the Commission’s economics chief, will present his new forecasts on Thursday morning. Everything is, of course, subject to change before publication: evolving factors include rising tensions between the West and Russia over Ukraine and the continued risk of new coronavirus variants emerging. The lingering uncertainty is nevertheless a good reason to relax the GSP debt rule before changing it, according to Gentiloni.
“We saw the effects of tightening too soon, of austerity measures, all too clearly in the aftermath of the last crisis ten years ago,” the Italian said in a speech at Bocconi University on Tuesday. “I think the rules should be reformed to ensure that high debt levels are reduced in a more gradual and realistic way, without stifling growth.”
Among the most affected states are Belgium, Cyprus, France, Greece, Italy, Spain and Portugal, all of which have debts above 100% of GDP. Applying the rules as they stand would trigger a new era of austerity, similar to policies after the 2008 financial crisis that pushed the euro zone into a sovereign debt crisis and called for a series of bailouts.
Such a repetition would prove disastrous for Europe’s recovery and undermine the continent’s costly battle against climate change. These post-pandemic realities have prompted capitals, think tanks and academics to relax the rules so that treasuries can manage their debt while investing in green projects to reduce greenhouse gas emissions.
“Ensuring gradual fiscal adjustment in heavily indebted Member States is necessary to stabilize and then reduce the debt ratio, while too abrupt growth could negatively impact consolidation and, therefore, debt sustainability” , the 11-page document said.
However, the Commission will be stricter in enforcing the bloc’s 3% cap on annual budget deficits unless treasuries can demonstrate how they plan to rein in spending.
Offending countries risk falling into the Excessive Deficit Procedure (EDP), a red flag tag for countries in breach of EU budget deficit rules. Indebted countries should not indulge the mistake of weakness, either, the text cautioned, stating that “the Commission will retain the possibility of opening a debt-based EDP if the debt does not decrease sufficiently.” »