EU debt reduction

Brussels wants to give EU capitals extra time to curb their debts and create space for public investment as part of an overhaul of the EU’s deficit rules. The European Commission would table a proposal at the end of the month to reform the Stability and Growth Pact, under which it would work out multi-year, country-specific plans with capitals for getting their debt burdens under control, EU officials said. The proposals come as member states face mounting fiscal burdens as they spend hundreds of billions of euros sheltering businesses and households from the energy crisis. Under the new blueprint, the commission would propose a four- or five-year plan to an EU member state to get its public debt burden on a credible, downward trajectory, officials said.

The national fiscal plan would need to pass a debt sustainability analysis and be approved by the commission and EU council. The new regime would ditch an EU rule that requires a 1/20th a year reduction in debt ratios by member states with debt above the EU’s 60 per cent of gross domestic product ceiling. That requirement is widely recognised as being unrealistic given public debt ratios have shot up dramatically since the pandemic eased. The new rules would, however, retain the EU’s main reference values of a 3 per cent of GDP public deficit limit and 60 per cent of GDP debt ratio, both of which are mentioned in the EU treaty.

The commission wants to downgrade the use of hard to measure variables that attempt to correct for the economic cycle, focusing instead on a simple gauge of public spending. After agreeing a debt plan with a member state, there would be annual progress checks and the threat of enforcement procedures. Elements could face a frosty reception in hawkish member states such as Germany. «In addition to the gradual reduction of debt, we have to make room for investment growth».

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