Politico: Commission plans to keep debt rule on ice in 2023

The European Commission plans to keep the debt rule afloat next year, when the EU fiscal framework is supposed to be reactivated, according to a draft in the possession of Politico.

The regulation, if it remains as it is, will offer great relief to France, Italy, Spain and Greece, which are among the EU countries that will emerge from the pandemic with increased public debt.

It is recalled that Brussels put the debt rule on ice in March 2020, so that EU governments can tackle the economic impact of the coronavirus pandemic by increasing their debt-free debt. in January 2023.

However, this seems to be changing, as the EU’s new “message” is that the Commission will be lenient as long as governments take control of their finances and start reducing their debts.

The Commission plans to present its new fiscal policy guidelines in early March so that governments can start drafting their budgets – as they did last year.

The document is a signal of the difficulties of re-implementing the so-called Stability and Growth Pact (SGP) in the post-pandemic era. Countries have spent excessive amounts to prevent unemployment and corporate bankruptcies sparking amid lockdowns, boosting debt levels across Europe.

The SGP would normally reduce budget deficits to 3% of RES and set targets for reducing public debt to 60%. Countries with debts higher than this limit should reduce the “gap” by 5% per year.

However, there have long been plans to reform the EU’s fiscal rules, and proposals to amend them have already been made since the summer of 2021.

In this context, according to the document cited by Politico, the Commission sees no reason to fully enforce the rules of the SGP on debt, when in any case they could be changed soon.

“As the outcome of the review of economic governance is pending, the Commission will not impose a debt reduction threshold as currently being formulated,” the Commission said in a statement. the requirements of the Pact ”.

This is an issue that requires delicate handling on the part of the Commission, as the whole situation is complicated by rising energy prices and the rapid spread of the Omicron variant of the coronavirus. This “double” blow acted as a brake on the growth of the bloc, to the point that the International Monetary Fund recently downgraded its forecast for the growth of the eurozone this year by 0.4 percentage points, to 3.9%.

The new reality

Among the countries that will benefit the most are Belgium, Cyprus, France, Greece, Italy, Spain and Portugal, whose debts exceed 100% of GDP. This is because the reactivation of the debt rule as it stands will trigger a new era of austerity, similar to the policies implemented after the 2008 economic collapse, which led the eurozone to the debt crisis and bailouts.

A repeat would prove disastrous for Europe’s recovery and undermine the continent’s costly “battle” against climate change.

As Politico notes, this post-pandemic new reality has intensified calls from countries, think tanks and academics to relax the rules so that governments can manage their debts while investing in green projects to reduce its greenhouse gas emissions. greenhouse.

“Ensuring a gradual fiscal adjustment in high-debt Member States is necessary to stabilize and then reduce debt ratios, while a very sharp consolidation could negatively affect debt growth and, consequently, debt sustainability.” , cites the 11-page document cited by Politico.

However, according to the document, the Commission will be stricter in imposing the 3% ceiling on annual budget deficits, unless countries can show how they plan to cut spending.

Countries that break the rule are in danger of falling into the excessive deficit process. Over-indebted countries should also not confuse leniency with weakness, warns the Commission’s draft, which states that “the Commission will retain the ability to start the excessive debt-based deficit process if the debt is not adequately reduced.”