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EU to tell members to start reining in national debt

EU to tell members to start reining in national debt

Tighter spending rules, suspended during the pandemic and energy crisis, are due to come back into force from January 1
European Commission president Ursula von der Leyen
European Commission president Ursula von der Leyen
Photo credit: AFP

The European Union will seek to rein in generous spending by member states permitted to help households and businesses through the Covid pandemic and energy crisis as it sets out a return to stricter budgetary discipline.

Governments will be instructed to withdraw support and consolidate national budgets when the European Commission adopts its fiscal guidance for 2024 on Wednesday, according to an EU official.

The gradual shift from unlimited spending during the pandemic and temporary and targeted aid allowed in the aftermath of Russia’s invasion of Ukraine comes as the bloc reviews its rules on public spending to avoid the severe budgetary adjustments of the past that pushed it into recession.

The fiscal thresholds, which were suspended during the pandemic to allow governments more leeway, are due to come back into force from January 1. The revised Stability and Growth Pact isn’t expected to be in place by then, however.

Member states and the commission, the EU’s executive arm, are slowly converging on some proposals for the new framework that would allow for more green and defense spending as Europe wants to beef up its military capabilities and boost clean technology development.

EU finance ministers are expected to discuss the fiscal targets and new economic governance framework at meetings in Brussels next week.

During the transition period before the revised rules are in place, the commission intends to gradually introduce some of the elements of its proposals for the new fiscal rules, the official said. 

This includes using debt-sustainability analysis to define member states’ fiscal trajectories and setting an expenditure benchmark that is easier to quantify than indicators such as the output gap, which are criticised by national governments.

The commission will also stop using the so-called 1/20th rule that forced countries with high levels of public debt to impose strict spending cuts.

This week’s guidance will outline the main parameters of the transition to greater fiscal discipline, while details of national targets will come in May when the commission issues its annual country-specific recommendations, an EU official added.

©2023 Bloomberg L.P.

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