Debt interest, an issue that delays the agreement on fiscal rules

Debt interest, an issue that delays the agreement on fiscal rules

After a long night of negotiations, EU economy and finance ministers moved closer to an agreement on reforming fiscal rules on Thursday evening. The last issues remain to be unraveled: the divergence between countries that favor excluding debt interest in the adjustment path between 2025 and 2027 and those that reject such flexibility. Technical talks will continue in an attempt to reach an agreement before the end of the year, according to Economic Affairs Minister Nadia Calviño. If necessary, an extraordinary Ecofin will be called to seal the reform in the week of December 18.

One of the main obstacles in the negotiation now lies in whether or not countries take debt interest into account when calculating adjustment paths. France and Italy favored flexibility. The Paris proposal was met with rejection by the small frugal ones. The Netherlands, Finland, Denmark, Sweden, Austria, Luxembourg and Ireland opposed excluding debt interest from the calculation of structural adjustment paths.

The fiscal rules, which were suspended due to the pandemic, will be applied again in January 2024, that is, in the midst of a context of high interest rates. For this reason, Paris and Rome have defended that, during the first three years, until 2027, debt interest is not included in the calculation of spending, in exchange for giving room for incentives and reforms.

Furthermore, the latest text proposal on the table takes the deficit objective one step further below the 3% of GDP threshold that Germany demanded. After this Thursday’s meeting, the text contemplates that countries with a debt greater than 90% must have fiscal buffers of 1.5% of GDP, while those whose debt is between 90% and a maximum of 60% of GDP. GDP, they can set a deficit target of 2%. A change from the previous version, which established 1.5% in both cases and which bothered less indebted countries.

That fiscal cushion was one of Berlin’s requirements, as was the debt safeguard. The review contemplates an annual debt reduction of 1% for those countries that exceed levels of 90% of GDP, and 0.5% in cases in which the liabilities are below 90% but above the threshold of 60% of GDP.

The new fiscal rules establish individualized adjustment paths for each country that guarantee a downward and sustained trajectory for the debt. The European Commission will look at the spending path of the countries, which cannot accumulate deviations greater than 0.75% in the four-year adjustment period nor more than 0.5% per year. If the Commission deviates from these paths above these thresholds, it may open an investigation and, if it considers it, excessive deficit procedures against non-compliant Member States.

Thursday night’s casual dinner promised to be long. It started from the proposal that Spain put on the table, as rotating presidency of the EU Council and arbitrator in the negotiations, and it was settled without an agreement and in the wee hours of the morning. The discrepancies remained after eight hours of conversation: France asked for more flexibility in the pace of deficit reduction and, along with Italy, they rejected considering debt interest to calculate the adjustment of the structural deficit.

Among these points of tension was the deficit reduction rate of 0.5% annually, for countries that exceed the threshold of 3% of GDP, which appears in the European Commission’s starting proposal. The French Minister of Finance, Bruno Le Maire, acknowledged on Thursday morning that he had accepted Germany’s requests, but required more flexibility for investments. Specifically, for those countries to which excessive deficit procedures are opened, Le Maire demanded that an adjustment of 0.3% can be made, instead of the mandatory 0.5% that already appears in the Commission’s proposal, if They execute investments and structural reforms during the 4-year adjustment period.

In fact, France and Germany, the EU’s decision-making engine, have negotiated in recent months in parallel with their European counterparts in an attempt to speed up reform. Upon arrival at the meeting, 90% of the text had been agreed between the two countries, however, there were still elements to be concluded.

2024 will mark the return to the application of fiscal rules after they were suspended during the pandemic, with the activation of the escape clause. The review was seen as necessary after years of financial crisis proved that previous economic governance was unrealistic in its application.

In an attempt to leave austerity policies behind, a reform of the Stability and Growth Pact was proposed in search of a new, more flexible formula, with room for investments and not just adjustments as in the previous version. The European Commission’s starting proposal was based on individualized adjustment plans for each country, negotiated with Brussels, for four years, extendable to seven if investments are made. The surveillance, which will be carried out by the European Commission, focuses on a limit on spending.

The review, according to Calviño, simplifies economic governance because the plans focus on a single monitoring indicator: the spending path. In addition, it ensures that the system will allow room for investments while reducing public debt levels.

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