The EU seeks more “realistic” debt control rules

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The governments of the European Union want future community fiscal discipline rules to guarantee the reduction of public debt in a more realistic way, take into account the need to invest in the ecological transition and defense community and are easier to apply.

It is the general starting point marked by the Ministers of Economy and Finance of the Twenty-seven on the eve of the European Commission presenting in the coming weeks some first ‘guidelines’ on the reform of the Stability and Growth Pact, which this year marks three decades and traditionally they are seen with very different eyes from each capital.

“There are different points of view between different Member States, but what brought us together in this discussion is that the rules have to be clear, enforceable and, at the very least, realistic. Whatever changes we make, we have to find what is realistic.” said at a press conference, after the second day of an informal council focused on economic governance, the Czech Finance Minister, Zbynek Stanjura, whose country presides over the EU this semester.

Among the Twenty-seven there is consensus that the rules must ensure the reduction of public debt -which has risen to close to 100% of GDP on average due to the pandemic-, “especially where it is high and also in good economic times”, has explained the economic vice-president of the European Commission, Valdis Dombrovskis.

Also that attention should be paid to the composition and quality of public finances, given the large investment needs for the green and digital transitions and our collective security”, as well as that its complexity should be reduced and compliance improved, he added.

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“There appears to be broad convergence on these priorities, so we are confident that we can move forward on the basis of the guidance that the Commission will publish later this autumn,” according to Dombrovskis.

It will be then, when knowing the details, when the divergences emerge between those countries in favor of the absolute priority being the control of finances and those that demand more flexibility, especially in view of the investment needs in the coming decades.

“Our first objective remains to ensure the sustainability of public debt. This will require fiscal adjustment, reforms and investments. These three elements should be combined to achieve a realistic, gradual and sustained reduction in public debt ratios”, highlighted Dombrovskis, who has given an outline of the main lines of the next proposal from Brussels.

The Commission believes that, given the divergences in debt ratios, there cannot be a one-size-fits-all solution, so more room could be given to Member States to design their fiscal paths, but this needs to be accompanied by more strict in case of non-compliance.

The European Commissioner for the Economy, Paolo Gentiloni, suggested this week that countries could develop multi-year plans and receive more flexibility if they commit to making reforms or investments, taking into account the experience left by the negotiation of the recovery plans of the Next fund (LON: NXT ) Generation.

To simplify the rules, Brussels is committed to having a single indicator based on public spending, in line with the recommendations of other organizations.

Current rules oblige governments to keep public debt below 60% of GDP and a deficit below 3%, and require adjustments if they do not comply, which during the financial crisis translated into harsh austerity policies and led the Commission to apply the rules with more flexibility, for which sanctions have never been imposed.

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The countries had agreed in 2019 to review the rules, considered too complex, but the pandemic forced them to be postponed. Brussels froze the rules to free countries from the budget corset in their fight against covid-19 and the war in Ukraine has led to the suspension being extended until the end of 2023.

Brussels relaunched the reform a year ago, which is now gaining speed, with the aim that when the rules are applied again there will be at least a consensus on them. The fear of many countries is that, if they are introduced as they are, many governments face a file for far exceeding the debt threshold.

“The debt cannot exceed 60% of GDP, but the average in the eurozone is 95%. It is very difficult to explain to citizens the reason for these rules,” insisted the Czech minister.

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