EU clash over budget rules

France and Italy have launched a push to revamp EU budget rules to spur investment and drive growth in a move likely to face a frosty reception from fiscally conservative member states.In a joint article in today’s Financial Times, Mario Draghi, Italian prime minister, and Emmanuel Macron, French president, call for debt raised to fund investments in priority areas to be “favoured by the fiscal rules”.The EU suspended its strict rules governing member state deficits and debt during the pandemic. It is now consulting over reforms to the regime for when the Stability and Growth Pact is eventually reimposed. Italy and France are among states seeking a less rigid approach to state borrowing.While EU members needed to bring down levels of indebtedness, public spending on future priorities “actually contributes to debt sustainability over the long run”, Draghi and Macron argue in their article.“Our strategy is to curb recurrent public spending through sensible structural reforms,” they say.“And, just as the rules could not be allowed to stand in the way of our response to the pandemic, so they should not prevent us from making all necessary investments.”Economists and some policymakers argue the existing SGP framework is ill-suited to the heavy debt burdens and massive public spending requirements that Europe faces in coming decades.France and Italy did not give any details of what the new SGP should look like. Still, some economists have been arguing for a “golden rule” to be introduced permitting certain investments — for example, green projects — to be stripped out of deficit or debt calculations. HOWEVER, one EU diplomat warned that northern capitals would “dig in” and oppose any such carve-outs from public spending rules, favouring more incremental changes to the SGP.The discussion will gather momentum early next year. Officials want it concluded in the first half while France holds the rotating EU presidency.Northern states are sceptical of golden rules, worrying they may lead governments to ignore swaths of public borrowing.The position of the new German coalition government will be critical. Politicians in Berlin have been discussing raising funds without violating the country’s constitutional debt break.The Dutch coalition said it remains “committed to a sound and prudent macroeconomic policy and necessary reforms by member states, aimed at sustainable debt, higher economic growth and upward convergence”.

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