The EU agreed reforms on Wednesday that would loosen fiscal rules aimed at encouraging investment while keeping debt and spending under control after France and Germany bridged their differences.
Finance ministers from the 27 members met via video to hammer out the deal — after their French and German counterparts met in Paris on Tuesday to pave the way for a compromise.
French Finance Minister Bruno Le Maire cited the deal on social media. “Historic agreement! After two years of intense negotiations we have new European fiscal rules,” he said.
Dutch Minister Sigrid Kaag said: “This agreement provides for fiscal rules that encourage reforms, with room for investment and tailored to the specific situation of the Member State in question.
“They work counter-cyclically so that potential economic growth is not limited. In addition, the rules also need to be better enforced, which was too often an issue in the past.”
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The fiscal restraint imposed on EU members — limiting countries’ debt to 60 percent of GDP and public deficits to 3 percent — was eased during the Covid pandemic to allow for greater government spending.
This was to be a temporary relief, but it started a two-year debate between countries led by Germany who wanted a return to strict controls and others led by France who wanted more flexibility to allow spending to finance, for example, the transition in the green energy or arms deliveries to Ukraine.
The compromise agreement confirms the 3% deficit target. But it softens the rules on how quickly and severely a country must cut spending to get back on track.
“It’s been a tough road. It’s been a tough road. And now we’ve finally reached safe harbor at a historic moment,” Spanish Finance Minister Nadia Calvino, whose country holds the EU presidency, said after the teleconference.
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“The rules are more realistic. They respond to the post-pandemic reality and also incorporate the lessons from the great financial crisis.”
Time was running out for a deal.
If there was no new plan, the original stability pact would have come back into force on January 1.
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Failure to agree new rules would also damage the EU’s credibility in the eyes of financial markets.
Now that a political agreement is in place, EU member states will seek approval from the European Parliament to pass binding legislation before the June elections.
The draft text provides for rules more tailored to each country’s particular situation, allowing big spenders a slower path back to austerity.
Brussels is proposing that member states present their own adjustment trajectory over a period of at least four years in order to ensure their debt sustainability.
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Reform and investment efforts will be rewarded with the possibility of extending this period of fiscal adjustment to seven years to make it less brutal.
The targets will be linked to spending developments, an indicator considered by some to be more relevant than deficits, which can fluctuate depending on the level of growth.
However, to satisfy Germany, countries with excessive deficits will have to make a minimal effort to reduce their deficit, which could be 0.5 percentage points per year.
Paris, however, won from Berlin a pause in this effort from 2025 to 2027. During this period the rising cost of debt linked to high interest rates will be taken into account
Berlin also wants a public deficit target of 1.5% of GDP in the most heavily indebted countries to maintain a margin of safety over the 3% ceiling.
To achieve this, an adjustment of at least 0.4 points of GDP per year is required, which can be reduced to 0.25 points in case of reforms and investments.
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The debt should be reduced by one percentage point per year on average over four or seven years.
Compared to the old rules, a French official argued that “the deficit target is less restrictive, the pace of achieving it is more progressive and rewards investment.”
Source: AFP