The European Commission is poised to unveil a proposal to reform the bloc’s fiscal rules that falls short of the strict limits sought by Germany, according to people familiar with the plan.
The commission, the European Union’s executive arm, agreed on Tuesday to suggest instead a system of benchmarks that would scrap the austere conditions of the past, said the people, who spoke on condition of anonymity before the plan is published on Wednesday.
Instead of having to respect the strict numerical targets for debt reduction requested by Berlin, member states will simply be told to bring debt levels down by the end of their medium-term budgetary plans, according to the people.
Meanwhile, the obligation for an annual structural fiscal effort of 0.5% of gross domestic product in the case of excessive deficits will remain, the people said. Countries with negative budget balances greater than 3% of GDP or debt levels above 60% of output will have to keep expenditure below mid-term growth.
Some elements of the proposal will require unanimous approval among member states, with difficult negotiations likely in the coming months. The European Parliament also has to give its consent to parts of the package.
The EU is revising the bloc’s rules on public spending, known as the Stability and Growth Pact, to give more leeway to national governments to decide on their own fiscal paths and allow for investment in priority areas such as green energy and defense. At the same time, the reform will strengthen enforcement of the framework.
One of the biggest sticking points was how to find a balance between flexibility given to nation states to adjust budgets and equal treatment between countries. Germany was particularly concerned the commission would be too lenient on highly indebted nations.
German Finance Minister Christian Lindner wanted member states to be obliged to lower public debt by 1% per year in the most worrying cases and by 0.5% in cases of mode moderate excess indebtedness.
In an op-ed published on Tuesday by the Financial Times newspaper, he insisted again that “safeguard provisions to ensure an actual decrease in debt ratios exceeding the Maastricht reference values in each year are needed,” in reference to the 3% and 60% limits.
Under pressure from some capitals including Berlin, EU finance ministers agreed last month that one of the issues needing further clarification was “the appropriateness and design of common quantitative benchmarks to support the reformed framework.”
The European Commission declined to comment on the details of the draft proposal, which is still subject to changes before adoption on Wednesday.
Germany considers the commission has made some concessions when it comes to safeguards and benchmarks, however, people familiar with the matter said. Officials in Berlin are hopeful the proposals will form a solid basis for negotiations between finance ministers that could lead to an overall agreement in the coming months, the people added on condition of anonymity because the discussions are private.
The reform of the pact was first launched in February 2020. The rules were then suspended early on in the Covid-19 pandemic to allow for the extra expenditure needed and remained on hold to cope with the fallout of Russia’s invasion of Ukraine.
They are due to be reinstated in January, and some member states have warned the old system isn’t fit for purpose given its constraints on investment.
EU finance ministers agreed last month that legislative work should be concluded by the end of this year. They are attending an informal meeting later this week near Stockholm, in Sweden, where the proposals are expected to be discussed on the margins of the event.
In spite of the difficult negotiations ahead, an agreement within the envisaged time frame is feasible, officials have said.
“There’s far more consensus than what you may think regarding the need for such rules,” Paschal Donohoe, president of the Eurogroup, which brings together euro-area finance ministers, said at the Bloomberg New Economy Gateway Europe event near Dublin last week. “We need to have credible medium-term fiscal rules.”