EU converges on principles of new debt rules, but details are missing

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EU converges on principles of new debt rules, but details are missing

European Union finance ministers agree on the general principles of reforming European fiscal rules to better adapt them to post-COVID economic realities, but crucial details remain to be negotiated, according to a document.

The draft conclusions of a meeting of the 27 EU finance ministers on Tuesday show that EU countries support much of the European Commission’s proposal presented last November, but its practical implementation remains a challenge.

Under the proposal, the current EU limit of 3% of GDP for the budget deficit and 60% of GDP for debt would remain unchanged.

The most indebted states would negotiate with Brussels individual ways of reducing debt linked to reforms and investments, departing from a single rule of annual debt cuts of 1/20 of the excess above 60% of GDP.

Given that many EU countries have debt well above the EU limit, they would have four to seven years to put it on a downward path to be negotiated with Brussels on the basis of a debt sustainability analysis by the European Commission.

Debt would be gradually reduced by limits set on annual net primary spending — spending that excludes one-off revenues, interest, or cyclical unemployment outlays — under direct state control.

This would be an improvement on the unobservable and revision-prone structural deficit, which is now the focus of attention and deeply displeases finance ministers.

A state could negotiate more time to cut debt if it promises reforms and investments that boost growth or resilience, bolster public finances or address strategic EU priorities such as the green and digital transition or defence capabilities.

In the event of disruptions in the economy that escape the power of a state, there would be an “escape clause” that would allow it to temporarily deviate from the agreed debt cut agreement, although it would have to be approved by other states.

MISCEPTIVE DETAILS

While EU finance ministers agree on these points, there are also many on which they disagree.

Chief among them is the methodology of the European Commission’s debt sustainability analysis, on which a large part of the debt reduction agreement will depend and which will limit the borrowing and spending capacity of States.

Equally controversial is the question of whether there should be numerical benchmarks for debt reduction that are common to all countries even if they negotiated individual paths and, if so, what they should be.

Other open questions are the requirements of the new framework for countries that do not have major debt problems, how to define the aggregate of expenditures, when exactly a State should have more time for debt reduction and how to enforce agreed plans.

Once finance ministers agree on the general principles on Tuesday and EU leaders endorse them at their summit on 23-24 March, the European Commission will start drawing up concrete proposals on the issues still open.

“That’s when the real discussions start,” said a eurozone official taking part in the talks.

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