Fearing austerity, Brussels opts to bend its debt rules again

Brussels will next year bend the EU’s rules for public spending to ensure highly indebted EU countries are spared from a new era of austerity.

European Commission Executive Vice President Valdis Dombrovskis and the Commission’s economy chief, Paolo Gentiloni, unveiled their plans Tuesday after relaunching a debate on reforming the very same rules — known as the Stability and Growth Pact (SGP).

But this reboot will avoid another bout of austerity, like that pursued after the 2008 financial meltdown, for fear that the old playbook could hamstring Europe’s post-pandemic economy and leave the bloc in another existential debt crisis.

“We should not see the ghost of ‘back to austerity,’ Gentiloni told reporters, sitting next to Dombrovskis in the European Parliament’s press room in Strasbourg. “We all know that we have to keep a supportive fiscal stance.”

Cyprus, Belgium, France, Greece, Italy, Portugal and Spain will all heave a great sigh of relief. Their debt piles are all at least 118 percent of their economic output after an expensive battle to contain the coronavirus — while the costly war against climate change draws closer.

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

The fiscal framework caps budget deficits at 3 percent of economic output and tries to drive public debt down to 60 percent of GDP. The rules and any talk of reform have been on ice since March 2020 to ensure governments focus on containing the pandemic without fear of breaching them.

Those days are numbered. Europe’s economic recovery is roaring back and Brussels is preparing to reintroduce the deficit and debt thresholds in January 2023 — but with some big modifications to ensure heavily indebted countries can cope.

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

“There is the possibility for the Commission to come with an interpretative communication … on the best use of flexibility” that “can be in place for 2023,” Dombrovskis said.

The EU’s executive arm issued a similar communication in 2015 that explained how it would bend the debt and deficit rules. Some within the Commission have said that guidance is partly to blame for the SGP’s overly complex nature, allowing the likes of France, Spain and Portugal to breach the thresholds without punishment.

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

Future changes

Gentiloni and Dombrovskis were more coy on possible permanent changes to the SGP, a nod to the fact that countries are likely to clash over the rules’ future make-up. Eight countries, spearheaded by Austria, recently pushed back against Southern calls to loosen the rules to help them handle their debt levels and fight climate change at the same time.

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

If the EU wants to make good on its target of cutting greenhouse gas emissions by 55 percent by 2030, it’ll need to spend €520 billion a year — money that’ll have to come from both the public and private sectors.

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

Then there’s the question of what to do with the high debt levels that many Southern European countries have. If left unchanged, the SGP rules would require them to drive their debt down to 60 percent within 20 years. 

Such demands would force countries such as Italy to reach budget surpluses of 6 or 7 percent every year, as the head of the eurozone’s bailout fund recently told Der Spiegel. “This is not feasible and does not make any sense,” Klaus Regling told the German publication.

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

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