EU Risks Unwanted Return to Old Rules as It Seeks New Debt Deal

Jorge Valero and Alonso Soto
·3 min read
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(Bloomberg) -- The European Union will likely struggle to meet a deadline to resolve differences on the bloc’s spending limits by the end of the year, setting up a possible return to old debt rules that would crimp some governments’ ability to stimulate their economies.

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“Time is of the essence,” European Central Bank President Christine Lagarde told a news conference during an informal gathering of EU finance ministers and central bank governors outside Stockholm on Friday.

“Getting back to the old rule is not something I have heard anybody regard as desirable, neither do we for that matter,” she said.

The European Commission, the EU’s executive arm, set out legislative proposals this week to reform the Stability and Growth Pact that would give greater leeway to member states to set their own fiscal trajectories and allow for investment in areas such as green energy, digital infrastructure and defense.

Reactions since Wednesday’s announcement show EU capitals remain far apart on key details, with Germany in particular calling for stricter debt-reduction targets.

The existing fiscal rules, which were suspended early on during the Covid pandemic, are due to be reinstated on Jan. 1. Without an agreement on the latest proposals, however, the EU would fail to reform the framework ahead of European elections next spring.

Lagarde welcomed key aspects of the commission’s plan, including increased national ownership of fiscal paths, a medium-term approach and stronger enforcement, adding that the ECB is preparing an opinion.

Spanish Finance Minister Nadia Calvino, who will chair the negotiations as her country takes over the EU presidency for the second half of 2023, told reporters on the sidelines of the event she would do her utmost to push for a deal, though she acknowledged it might not come by year-end.

“We are going to do everything possible to reach an agreement, or in any case make as much progress as possible,” she said.

European Commission Vice President Valdis Dombrovskis told reporters the timetable is “very ambitious” and said it’s hard to predict how long the legislative process will take.

The bloc’s finance ministers have agreed to try to reach a legislative agreement by the end of 2023, including approval from the European Parliament.

“Markets are watching, there’s a lot of uncertainty, globally, internationally, economically, so it is upon us to have a robust package in place,” Dutch finance chief Sigrid Kaag said. “I am concerned that we will spend a lot of time talking about talks as opposed to engaging in talks.”

Enforcement Problem

Some economists said the proposals still fail to address the central issue of how to force member states to comply with the new conditions, undermining their credibility in the markets.

“It is less a problem of the rules, rather one of enforcement,” LBBW chief economist Moritz Kraemer said.

The need for fiscal clarity comes as Europe is battling to bring down surging inflation that has led to an ongoing cycle of monetary tightening, complicating the spending picture for governments that also have to find more money to service their debt.

“A return to the old world would mean fiscal stimulus as an important driver of growth will become weaker,” according to ING economist Carsten Brzeski. “For the ECB, this would mean that they have to be careful with further rate hikes.”

Swedish Finance Minister Elisabeth Svantesson, whose country’s presidency of the EU ends in June, sought to push back against pessimism about reaching a deal this year.

“It’s a good start if everyone is a bit unhappy, it’s a good start for negotiations,” she said.

--With assistance from Niclas Rolander, Kamil Kowalcze, Maria Tadeo, Max Ramsay, Alessandra Migliaccio, Alessandro Speciale and William Horobin.

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