EU Moves Closer to Agreement on New Fiscal Rules; Significant Differences Persist, By Reuters

By Jan Strupczewski

BRUSSELS – European Union finance ministers are expected to make progress on Thursday toward establishing new fiscal rules for the bloc, although significant disagreements over the pace of debt reduction remain. Senior officials have indicated that while discussions are advancing, consensus is still a long way off.

These negotiations are part of a broader effort to revise the EU’s fiscal framework, which serves as a foundation for the euro. Financial markets are keenly observing these developments. The existing rules have been on hold since 2020, but are scheduled to be reinstated in 2024. EU governments aim to update these regulations by the end of the year to ensure a smooth transition.

Current rules cap budget deficits at 3% of gross domestic product (GDP) and public debt at 60% of GDP. If these thresholds are exceeded, measures are imposed to compel countries to rectify the situation swiftly.

Many governments across Europe are currently exceeding these limits, all while needing to invest in initiatives to combat climate change. This creates a challenging dynamic in the discussions, where the focus is on striking a balance between reducing debt and making necessary investments and reforms.

Complicating matters further, ministers are also debating the distribution of authority between themselves and the European Commission, as well as methods for enforcing any agreed-upon rules. All components of the negotiations are interconnected, necessitating compromises across the board.

The primary sticking point remains the pace of debt reduction. Germany insists that all EU member states should be required to decrease public debt by a minimum of 1% of GDP annually. In contrast, the European Commission and France propose that any debt reductions over a period of four years would suffice. This timeframe could even be extended to seven years if a government invests in key areas prioritized by the EU, such as climate action.

Furthermore, France is open to accepting a specific numerical target for debt reductions per the German proposal, provided it permits averaging over a four- to seven-year span to accommodate yearly variations.

Spain, which currently holds the rotating presidency of the EU, sought to create a draft legal document outlining these rules by Thursday. However, due to ongoing divisions, a significant compromise was not ready, with Madrid instead offering a framework for narrowing differences—a so-called "landing zone."

According to a senior official involved in the talks, there are no specific figures established in the landing zone regarding debt reduction benchmarks, but discussions continue on concrete numbers, including proposals from Germany and Denmark. The official noted that while progress has been made, much work remains.

The situation is further complicated by ongoing disagreements over a Spanish proposal to allow more time for debt reduction if a country follows through on reforms outlined in its post-COVID recovery plan, which focuses on transitioning to a greener and more digital economy—reforms that are prerequisites for receiving funds from the EU Recovery Fund.

Many governments feel that merely adhering to the recovery plan, which has already been funded by the EU, does not warrant an extension of an additional three years for debt reductions.