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Southern dreams of a debt-friendly Europe are turning into a nightmare.
Eight northern and eastern EU capitals have banded together to push back against the South’s hopes of loosening the bloc’s deficit rules to contend with the high public debt left over by the pandemic.
Austria, Denmark, Latvia, Slovakia, the Czech Republic, Finland, the Netherlands and Sweden effectively crushed those hopes in the shape of a position paper, signed by their finance ministers, slated for release before an informal gathering of their peers in Slovenia Saturday.
“Reducing excessive debt ratios has to remain a common goal,” said the one-page document, seen by POLITICO on Thursday. “The [EU] Treaty … obliges all Member States to avoid and correct excessive deficits.”
The paper is a hammer blow to France, Italy and Spain, which have said the rules should be adapted to post-pandemic realities and climate change. The so-called Stability and Growth Pact caps budget deficits at 3 percent of economic output and tries to limit public debt to 60 percent. That’s simple enough, but the framework is also filled with loopholes that have allowed Brussels to bend the rules and avoid fining anyone for straying from the benchmarks.
Brussels put those thresholds on ice last year by activating the “general escape clause” so that governments could battle the pandemic without fearing reproach from the EU’s executive arm. The European Commission’s economy chief, Paolo Gentiloni, has also been a strong advocate for change and plans to begin talks after the September elections in Germany.
Berlin has traditionally opposed easing the rules but could see a shift in economic policies under its next government, depending on who takes power.
The Austrian-led anti-debt club, for its part, says it’s open to change — just not the kind that Paris, Rome and Madrid were angling for.
“We are open to debate on improving economic and fiscal governance,” the position paper said — but only as far as “simplifications and adaptations that favour consistent, transparent and better application as well as enforcement of the rules.”
Battling the coronavirus and introducing lockdowns have proven very expensive, pushing public debt within the single currency union to above 100 percent of economic output. That’s not a problem when interest rates are low, but fears are growing that a debt crisis could erupt when markets punish governments with higher borrowing rates in the future.
Those fears are more pronounced in Southern Europe, where the debt pile has climbed above 118 percent of GDP in France, Italy and Spain. Making the deficit rules more flexible would avoid the austerity policies that hammered Europe’s economy after the 2008 financial meltdown — triggering the sovereign crisis and threatening the existence of the euro.
This flexibility could come from tweaks like easing demands on how quickly countries should reduce their public debt and waiving green investments from the EU’s deficit brake.
Some academics have urged EU capitals to agree on any such rule changes before the EU reintroduces the SGP in early 2023. But that’s not the priority for the anti-debt club’s eight finance ministers.
“The deactivation of the General Escape Clause and a possible reform of the Stability and Growth Pact should not be linked,” the paper said. “Discussions on improving the current economic government framework need ample time and should be based on broad consultations by the Commission.”
“Quality is more important than speed,” the ministers added.
This story has been updated.
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