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EU edges closer to deal on relaxing debt rules post-pandemic
Pandemic

EU edges closer to deal on relaxing debt rules post-pandemic

18.01.2022
Revisions would allow debt-stricken countries to escape severe austerity cuts
Public spending levels have been a source of bitter dispute among member states
Public spending levels have been a source of bitter dispute among member states
Photo credit: Shutterstock

The European Union is finding areas of “broad agreement” on revisions to its fiscal rules that would allow debt-stricken countries to escape severe austerity cuts after the massive expenditure made during the pandemic, a top official said Tuesday.

“As always, devil maybe is in the detail, so we would need to find the right balance ensuring credible debt reduction pathways without undermining economic growth and providing space for financing the green and digital transitions of the economy,” European Commission Vice President Valdis Dombrovskis said at a news conference after finance ministers discussed the topic.

The EU launched in 2020 a review of its Stability and Growth Pact that sets deficit and debt limits for the 27 countries. Organisations including the International Monetary Fund have said that the rules require adjustments to better support growth. The rules were suspended for the first time at the start of the Covid-19 pandemic through 2023 to allow for the extra spending required to weather the crisis.

Dombrovskis said that EU countries are seeing a growing consensus that the bloc should have credible, gradual and growth-friendly debt-adjustment trajectories for member states. EU governments also support simplifying the pact and scrapping indirect indicators, such as the structural balance, to focus more on expenditure benchmarks to control their public finances.

Public spending levels have been a source of bitter dispute among member states in the decade since the financial crisis. Northern countries accused southern member states of mis-spending, while these governments said that the European fiscal rules prolonged the pain after the previous downturn and triggered a self-inflicted recession.

The commission is discussing with member states a proposal for the middle of this year to relax the efforts to cut down public debt levels and to favor some types of public investments, particularly to support the climate transition. Dombrovskis discussed these ideas on Monday with the new finance ministers of Netherlands and Germany, whose governments were reluctant in the past to change the rules.

Speaking to reporters after Tuesday’s meeting, German finance minister Christian Lindner said that he is open for a “reasonable development” of the fiscal rules, although he repeated that the framework proved its flexibility during the crisis. In the future, the stability pact needs “to pursue the idea of growth as well as fiscal stability and sustainable government financing,” he said.

©2022 Bloomberg L.P.


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