EU agrees on principles of new debt rules, but many details still open

European Union finance ministers are converging on broad principles of a reform of Europe's fiscal rules to make them fit better with post-pandemic economic realities, but crucial details remain to be negotiated, a document showed.

Draft conclusions of a meeting of the EU's 27 finance ministers on Tuesday showed EU countries support much of the European Commission's proposal presented last November, but its practical implementation is still a challenge.

"We need stable fiscal rules ... that are fit for the new realities and I think this will be the commitment of the council this morning," European Economic Commissioner Paolo Gentiloni told reporters on entering the talks.

The rules, created in 1997 and revised three times since, are facing a new challenge after government support for the economy during the COVID-19 pandemic and the 2022 cost of living crisis boosted public debt, while efforts to stop climate change require huge public investment.

Under the proposal from November, the EU's existing limit of 3% of GDP for budget deficits and 60% of GDP for debt would stay unchanged.

But governments with debt above the limit would negotiate with the Commission individual debt reduction paths linked to reforms and investments, departing from a one-size-fits-all rule of annual debt cuts of 1/20th of the excess above 60% of GDP.

Since many EU countries have debt well above the EU limit, they would get between four and seven years to put it on a downward path that would be negotiated with the Commission on the basis of a Commission debt sustainability analysis.

Debt would gradually fall through limits set on annual net primary expenditure - spending that excludes one-off revenues, interest or outlays on cyclical unemployment - which the government has under direct control.

This would be an improvement on the unobservable and revision-prone structural deficit which is the focus now, and which finance ministers strongly dislike.

A government could negotiate more time to cut debt if it promises reforms and investment that boost growth or resilience, strengthen public finances or addresses EU strategic priorities, like the green and digital transition or defence capabilities.

In case of shocks to the economy that are outside a government's power, there would be an "escape clause" allowing a temporary deviation from the agreed debt cutting deal, though it would have to be approved by other governments.

TRICKY DETAILS

While there is convergence among EU finance ministers on these points, there are equally many on which they disagree.

Chief among them is the methodology of the Commission's debt sustainability analysis on which so much of the debt cutting deal is to depend and which would limit a government's borrowing and spending power.

Equally controversial is the issue of whether there should be any numerical benchmarks for debt reduction that would be common to all countries even if they negotiate individual paths, and if yes, what they should be.

Other open questions include the new framework's requirements for those countries which do not have any major debt problems, how to define the expenditure aggregate, when exactly a government should get more time for debt reduction and how to enforce the agreed plans.

Once finance ministers agree on the broad principles on Tuesday and EU leaders back them at their summit on March 23-24, the Commission will start drafting concrete proposals on the still open questions.

"That's when the real discussions will start," one euro zone official involved in the talks said.