Fearing austerity, Brussels chooses to bypass its debt rules again – POLITICO

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Next year, Brussels will change EU public spending rules to ensure that heavily indebted EU countries are spared a new era of austerity.

European Commission Executive Vice-President Valdis Dombrovskis and Commission Economics Chief Paolo Gentiloni unveiled their plans on Tuesday after relaunching a debate on reforming the same rules – known as the Stability Pact and growth (PSC).

But this restart will avoid another period of austerity, such as that continued after the 2008 financial crisis, lest the old playbook cripple Europe’s post-pandemic economy and leave the bloc in another. existential debt crisis.

“We shouldn’t see the ghost of ‘back to austerity’, Gentiloni told reporters, sitting next to Dombrovskis in the European Parliament press room in Strasbourg.” We all know we have to maintain a budgetary position. favorable.”

Cyprus, Belgium, France, Greece, Italy, Portugal and Spain will all breathe a big sigh of relief. Their piles of debt account for at least 118% of their economic output after a costly battle to contain the coronavirus – as the costly war on climate change draws closer.

But the “frugal” camp of countries, like Austria and the Netherlands, could protest the move as they continue their crusade for “strong fiscal discipline” after years of lax enforcement from Brussels.

The fiscal framework caps budget deficits at 3% of economic output and attempts to reduce public debt to 60% of GDP. Rules and all reform rhetoric have been frozen since March 2020 to ensure governments focus on containing the pandemic without fear of breaking them.

These days are numbered. Europe’s economic recovery is back and Brussels is preparing to reintroduce the deficit and debt thresholds in January 2023, but with some important changes to ensure that heavily indebted countries can cope.

Details will likely emerge in a political communication document in February or March so that EU finance ministers can prepare their budgets accordingly, Commission officials told POLITICO on condition of anonymity.

“There is the possibility for the Commission to present an interpretative communication… on the best use of the flexibility” which “may be in place for 2023”, said Dombrovskis.

The EU executive issued a similar communication in 2015 which explained how it would get around the debt and deficit rules. Some members of the Commission said the guidelines were partly responsible for the overly complex nature of the SGP, allowing countries like France, Spain and Portugal to cross the thresholds without sanction.

This new direction would be a one-time deal, “not a permanent instrument,” to help governments breathe easy life as they prepare their budgets for next year and fight to keep the recovery on track, Gentiloni said.

Future changes

Gentiloni and Dombrovskis were more timid about possible permanent changes to the GSP, a nod to the fact that countries are likely to clash over the future composition of the rules. Eight countries, led by Austria, recently rebuffed calls from the South to relax the rules to help them manage their debt levels and at the same time tackle climate change.

The consultation will last until the end of the year. The Commission will then try to find consensus among EU capitals to change the rules, which are not only complex but have also stifled public investment in the past.

If the EU is to meet its target of reducing greenhouse gas emissions by 55% by 2030, it will have to spend 520 billion euros per year, money that will have to come both from the public sectors and private.

“A key question that needs to be considered in the coming months is how our framework can most effectively facilitate these investments,” said Gentiloni.

Then there is the question of what to do with the high debt levels of many southern European countries. If left unchanged, GSP rules would require them to reduce their debt to 60% within 20 years.

Such demands would force countries like Italy to hit budget surpluses of 6 or 7% every year, as the head of the eurozone rescue fund recently told Der Spiegel. “It is not feasible and makes no sense,” Klaus Regling told the German publication.

If EU capitals agree to changes, the Commission will propose reform bills in the first half of the year.

“But this is the result of our debate, not the start,” Gentiloni said. “At the start, we know the guidelines will be there for 2023.”

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