What to Watch With EU Finance Chiefs Set to Lock Horns on Fiscal Rules

William Horobin and James Regan
·3 min read

(Bloomberg) -- European Union finance ministers meeting outside Stockholm this week are expected to lock horns over proposals to reform the bloc’s spending rules that are pitting fiscally hawkish Germany against more highly indebted member states as they seek an agreement this year.

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The European Commission, the EU’s executive arm, outlined proposals on Wednesday to reform the so-called Stability and Growth Pact, which sets limits on budget deficits and debt. These fell short of German Finance Minister Christian Lindner’s call for stricter debt-reduction targets.

Finance ministers will also have a first opportunity to test out their differences of opinion on improving the banking union following a proposal to make it easier to wind down troubled small and medium-sized lenders.

The bloc’s finance chiefs will be joined by its central bank governors on Friday and Saturday at the informal meeting, which includes working sessions on financing European growth, sustainable public finances and coordinating support for Ukraine’s longer-term reconstruction.

Fiscal Rules

The commission’s attempt to reconcile differences between member states is proving challenging. Immediately after the new proposals were announced on Wednesday, Lindner called a press conference to explain that the proposals still need significant adjustments to ensure countries overcome high deficits and warned that approval isn’t automatic.

Other member states quickly weighed in with concerns that new safeguards on repairing finances could undermine the intention to avoid uniform, automatic rules that don’t respect individual situations or make room for continued investment.

Banking Union

Europe is trying to come up with ways to improve mechanisms designed after the 2008 financial crisis that spread the cost of failing banks. The concern is that rules haven’t worked in practice with some countries circumventing the framework, putting taxpayers on the line again to protect depositors.

The Credit Suisse Group AG crisis and turbulence in the US banking sector with the collapse of Silicon Valley Bank have added pressure for quick progress. But the commission’s idea of tapping national deposit protection funds to bridge gaps at banks that don’t have sufficient reserves could prove controversial. It will test the limits of appetite for another leap toward risk sharing, as well as concerns over whether guarantees that are too broad would create moral hazard.

Rebuilding Ukraine

The EU is looking beyond the war in Ukraine at how to coordinate financial support to help rebuild the country in the longer-term, also taking into account its path toward closer integration with the bloc.

The EU is providing a support package worth as much as €18 billion in 2023 in the form of highly concessional loans. Member states also agreed last month to provide Ukraine with 1 million rounds of artillery ammunition over the next year.

ECB and Economy

European Central Bank President Christine Lagarde and fellow rate setters from across the region will also be attending the Stockholm gathering. The ECB chief is scheduled to speak at the Eurogroup news conference on Friday, though with the next rate meeting set for May 4, she has to keep quiet on monetary policy.

Instead, she might be asked about first-quarter economic output readings, due to be published early Friday. The data are likely to show the euro zone and its major economies dodged a recession that looked inevitable a year ago when Russia invaded Ukraine.

Lagarde will share the stage with EU Economy Commissioner Paolo Gentiloni, who may provide some hints on new forecasts for the region, due next month. Together with Eurogroup President Paschal Donohoe, they are likely to remind governments that any fiscal measures to cushion the biggest cost-of-living crisis in a generation must be temporary, targeted and timely.

The fiscal rules debate is also important for the ECB after it introduced a so-called Transmission Protection Instrument, which in theory allows the central bank to buy bonds of countries experiencing unwarranted borrowing costs. Yet for a country to be eligible, it would have to be compliant with the EU fiscal framework.

--With assistance from Kamil Kowalcze, Jorge Valero and Niclas Rolander.

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