Taking into account a situation marked by a high level of public debt in the Member States following the Covid-19 pandemic and the need to invest massively in order to make a success of the climate and digital transitions and to reduce the European Union’s dependence on Russian hydrocarbons, the European Commission recommends simplifying the European economic governance framework by giving priority to the definition of credible public debt reduction trajectories adapted to national specificities (see EUROPE 13059/2).
“We are aiming for a simpler system of fiscal rules, with greater country ownership and more latitude for debt reduction - but combined with stronger enforcement”, said the EU institution’s Executive Vice-President Valdis Dombrovskis on Wednesday 9 November.
If the Commission’s guidelines are adopted following legislative proposals expected in the first quarter of 2023, Member States will be required to present macro-economic plans adapted to the macroeconomic situation. These plans would cover a four-year period during which their public finances would have to comply with a gradual - but continuous - reduction path of excessive public debt or, for low-debt countries, maintain a prudent fiscal policy.
A Member State could apply for a more flexible path by extending the duration of its macro-fiscal plan to a maximum of 7 years. In exchange, it will have to commit to more reforms and investments.
“So it is not a question of whether to put debt onto a reduction path towards 60% of GDP. It is more a question of how each country gets there - and especially, how fast”, Mr Dombrovskis stressed.
These plans will have to be agreed with the Commission and approved by the EU Council, similar to the national recovery plans under Next Generation EU. They could mean an end to the annual submission by Member States of their annual stability and reform plans in April, but not of their national draft budget plan for year N+1 by mid-October of year N.
The Commission does not call into question the Maastricht Treaty targets of 60% and 3% respectively for the maximum limits for government debt and deficit, which can still lead to excessive deficit procedures in the event of an infringement by a Member State. On the other hand, the rule providing for an annual reduction of 1/20th of the excessive public debt (above 60% of GDP), introduced in the last reform of the ‘Stability and Growth Pact’, but never applied because it would lead to excessive budgetary consolidation, will be abandoned.
This was a way for the Commission to “learn the lessons” of an inadequate legal framework, Mr Dombrovskis acknowledged, but refused to apologise on behalf of the EU institution for the havoc wreaked during the years when austerity was advocated as a way to clean up public finances.
Differentiation. A distinction would be made according to a country’s level of public debt. For countries with moderate or high public debt, the Commission would propose a multi-annual adjustment path in terms of net public expenditure covering 4 years. Member States with substantial public debt challenges will have to complete their fiscal adjustment over the life of their plan. Countries with a moderate public debt challenge will have to complete their adjustment within 3 years of their plan.
“Countries with substantial public debt challenges would still need to reduce their debt faster than those with less pressing concerns”, Mr Dombrovskis said.
It should be noted that in the event of an unforeseen downturn in the macroeconomic situation, the Commission suggests introducing a general escape clause specific to a Member State. This would be in addition to the general escape clause of the Pact, activated at the outbreak of the pandemic in spring 2020 and active until the end of 2023. The activation of such a clause would allow a country facing exceptional circumstances beyond its control to deviate from the agreed path.
Finally, even if these plans are long-term, it would be possible for a new government in power to review and modify the macro-fiscal plan previously negotiated by a previous government, as is the case with national stimulus plans.
Increased monitoring of compliance with commitments. By giving Member States more flexibility in defining their adjustment path, the Commission believes that ex-post monitoring of compliance with commitments should be strengthened.
In addition to the possibility of opening an ‘Excessive Deficit Procedure’ (EDP), the institution suggests activating - by default - such a procedure if a highly indebted country does not comply with the plan it has defined.
“If we see that a country does not live up to its commitments, we will be able to request a revised plan, with a more stringent fiscal path - and impose financial sanctions too”, Mr Dombrovskis noted.
Nevertheless, the amounts of financial sanctions will be reduced in order to be used effectively. And, according to a senior EU official, the Commission is considering restrictive measures that are more damaging to a Member State’s reputation than to its budget, such as increased reporting to economic actors or high-level missions to the country concerned.
The European Commissioner for the Economy, Paolo Gentiloni, also said that the public debt-based EDP procedure, already included in the Pact, would be made “operational by clarifying the criteria for activation and deactivation”.
In addition, in its guidelines, the Commission proposes to strengthen the excessive macroeconomic imbalance procedure by paying particular attention to the preventive arm.
Golden rule. However, it does not propose the introduction of a ‘golden rule’ that would exclude certain expenditure from the calculation of the public deficit, in particular expenditure on the fight against climate change.
“A golden rule would not cancel the debt”, it would be a different way of dealing with this expenditure from an accounting point of view in order to facilitate investment, Mr Gentiloni said. With the possibility of modulating public debt reduction trajectories, “we chose a different way to reach a similar goal”, he added.
The idea of creating a central fiscal capacity at European level was also discarded in order, according to Mr Gentiloni, “not to overload” the reform that is underway.
As for the timetable, the Commission hopes to receive feedback from the Member States before presenting specific legislative proposals, if possible in the first quarter of 2023.
Asked about the timetable later in the afternoon by EUROPE, Mr Dombrovskis did not deny the advantage of achieving the reform by early 2024, when the Pact’s opt-out clause will be deactivated. But, he recalled, “the two issues are not linked” legally. Should the reform take longer to be adopted, fiscal guidelines for 2024 will be set out as is currently the case for 2023.
See the Commission communication: https://aeur.eu/f/3z5 (Original version in French by Mathieu Bion)