EU seeks more flexible penalties to enforce debt-reduction rules

The European Union is considering a more flexible set of penalties for member states breaching debt-reduction commitments in an attempt to make fiscal rules more enforceable after years of spotty implementation.

The European Commission also wants to lower the monetary value of existing fines as the current system proved to be politically impossible to apply in the past, said EU officials speaking on condition of anonymity.

The proposals will be part of the review of the bloc’s Stability and Growth Pact -- which governs public deficits and debt levels -- to support investment and a more gradual reduction of the high debt accumulated in the EU to account for the more uncertain economic environment.

The EU’s executive arm is expected to outline its review on November 9 and could follow with legislative proposals early next year. The revision will likely bring some of the most significant changes to the bloc’s fiscal rules in more than two decades. Commission spokespeople declined to comment on the proposal.

Member states have shown a willingness to scrap parts of the existing requirements that force them to impose severe fiscal cuts when they have taken on excessive levels of debt.

Even the Netherlands and Germany, which have long supported strict budget rules, are willing to offer more flexibility to governments for balancing their budgets as long as there are more robust mechanisms in place to ensure compliance with the fiscal targets, according to these countries’ proposals for the review.

Key Trade-Off

EU economy commissioner Paolo Gentiloni said last September that there should be a trade-off between more leeway for member states to set up their adjustment paths and tighter controls to ensure they meet their commitments.

“Simplification, stronger national ownership and better enforcement will be the defining features of an improved framework, with the overall objective of supporting debt sustainability and sustainable growth,” he said back then.

EU officials want to avoid having only the ‘nuclear option” of a fine totaling 0.2% of GDP of the sanctioned member state as it is currently structured. Indeed, the penalty is so onerous that it’s never been applied to a member state despite numerous breaches.

Instead, the commission is looking at smaller fines, like those applied to countries breaching the statistical rules. Officials also said that public debates over budgetary plans and negative opinions from the commission add media and market pressure that play a decisive role in convincing national governments to amend non-compliant budgets, as was the case with Italy in 2018.

The EU executive’s arm is considering granting national governments up to seven years to reduce their excessive debt in exchange for investment and reform proposals, with an expenditure ceiling to ensure the sustainability of national spending, said the EU officials familiar with the plan, which is still subject to changes ahead of the publication date.

The commission will offer up to three years of extra time to member states coming forward with valid measures on top of a common four-year period to balance their public budgets, the officials said.

The commission intends to keep the existing deficit and debt thresholds of 3% of GDP and 60% of GDP respectively under the review. However, it will be a challenge to adopt the revision before the fiscal rules kick in again in 2024 after being suspended at the onset of the pandemic, one of the officials cautioned.