Fiscal rules: Germany wants binding debt reduction targets for EU countries

Germany is pushing for binding debt reduction targets as part of the European Union’s budgetary rules, according to a document seen by WTX News.

EU law requires countries to have a budget deficit below 3% of gross domestic product (GDP) and public debt below 60% of GDP but many countries exceed those thresholds after years of intense spending to cushion the impact of the COVID-19 pandemic, Russia’s war in Ukraine and the energy crisis.

The European Commission argues the new economic reality warrants a reform of the bloc’s fiscal rules and has taken preliminary steps to revise the current framework.

In a report published last November, the Commission proposed to keep both the 3% and the 60% targets untouched but with greater flexibility to allow governments to adapt the objectives to the specific circumstances of each country.

Member states would be able to come up with their own blueprints to control public deficit and gradually decrease debt across a four-year period.

Highly indebted countries, such as Greece and Italy, could be granted an extra three years to adjust their finances and achieve what Brussels calls “prudent fiscal policy.”

The much-criticised norm that imposed a uniform 1/20th rate of debt reduction would be scrapped and replaced by country-tailored pathways, a tweak that can help avoid the most painful sacrifices.

But Germany, a country that has long advocated for fiscal moderation, disagrees with this approach and has asked the European Commission to include a sort of one-size-fits-all rule to bring down debt.

Germany’s proposal includes “common safeguard provisions” to reduce countries’ debt ratio by at least 0.5 percentage points per year for countries where debt exceeds 60% of GDP.

Countries well above that threshold would need to reduce their debt by at least 1 percentage point per year, according to the German non-paper.

“The current ideas of the Commission should be amended in a way that the medium-term fiscal plans lead to a (sufficient) decline in high debt ratios in each year… it should also be ensured that an actual reduction in debt ratios on an annual basis is achieved,” the non-paper states.

The European Commission wants to have the reformed fiscal rules in place by January 2024 and is expected to present legal proposals in the coming weeks.

The new framework will take into account the enormous injection of cash needed to speed up the green and digital transition, a dual effort estimated to cost EUR650 billion in additional investments per year until 2030.

EU countries have spent the last months debating how to strike a balancing act between strong investments and sustainable debt reduction, with no clear answer in sight.

Brussels, meanwhile, has decided to delay fines for non-compliant countries until next year.

At the end of the third quarter of 2022, government debt stood at 93% of GDP in the euro area and 85.1% in the European Union.

The highest ratio of government debt to GDP was in Greece where it’s at 178.2%, followed by Italy with a 147.3% rate.

In that same period, German debt was at 66.6% of GDP, according to Eurostat.

“If the reformed framework does not achieve a reduction in the debt ratios, it must be revised after a maximum period of four years,” the German non-paper warns.