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IMF: EU must balance the books, create a rainy-day fund

The EU needs deficit rules that force high-debt countries to balance their budgets within three to five years, according to the International Monetary Fund.

The Washington-based Fund called for a “risk-based” framework in a report released Monday, which comes just as the European Commission is preparing draft measures to reform the so-called Stability Growth Pact (SGP).

The IMF also stressed the need for a rainy-day fund that can guard EU countries against sudden economic shocks, such as the coronavirus pandemic, and help finance initiatives that fight climate change.

The catch: Everyone agrees the rules need reform, but there’s a gaping divide between the penny pinchers in the North and the indebted South on what needs to be done.

Such divisions threaten to create a political deadlock over how governments should handle their finances at a precarious time of war, rising prices and high public debt — a perfect storm for a crisis.

“High debt and rising interest rates are making it harder for governments to address today’s multiple priorities, including tackling extreme increases in the cost of living and addressing the climate emergency,” IMF staffers wrote in a blog post that accompanied the report. “Reform of the EU fiscal framework cannot wait.”

The SGP formally caps governments’ budget deficits at 3 percent of economic output and tries to keep public debt piles below 60 percent of GDP. But loopholes within the fiscal framework and poor policing on the part of the Commission have allowed capitals to bend the rules to a breaking point.

Lackluster enforcement allowed eurozone debt to climb to 86 percent just before the pandemic. The ensuing spread of COVID-19 and resulting lockdowns saw public spending go into overdrive, prompting Brussels to put the deficit rules on ice so that governments could use taxpayer money to prevent mass unemployment and bankruptcies.

As a result, eurozone debt was above 95 percent at the end of March. Greece led the pack at 189 percent, followed by Italy at 152 percent and Portugal at 127 percent. France and Spain both had a debt burden of over 114 percent.

These are the types of countries that need to balance their books over the coming years, in the IMF’s eyes. Moreover, national fiscal watchdogs should get more power to hold their governments to account over public expenditure, based on a spending plan for the medium-term, the staffers said.

Little spending power

The SGP is set to come back into force at the end of 2023. Many southern capitals fear the rules, if not loosened, will force them into a new era of austerity at a time when the EU is building renewable sources of energy to reduce its carbon footprint — while weaning itself off of Russian fossil fuels.

These goals are still possible if countries can exclude green investments from the EU’s deficit rules and get more time to chip away at their debt piles, according to southern capitals. Northern policymakers have ruled out the first idea but sympathize with the second one.

An EU rainy-day fund that also finances climate initiatives can solve this puzzle, the IMF said, drawing inspiration from the EU’s temporary €800 billion recovery fund.

“A dedicated climate investment fund is an important part of the proposal” to “help countries better manage economic downturns and provide essential public goods,” IMF staffers wrote.

The blog post stopped short of advising how big the rainy-day fund should be. Instead, the IMF pointed to estimates that say the EU will need to spend up to 1 percent of its economic output every year on climate reforms to reach net-zero carbon dioxide emissions by 2050. That amounts to some €170 billion every year.

The IMF also didn’t specifically provide a blueprint on how to funnel money into the rainy-day fund, but noted it could be done with EU levies or through country contributions, with the caveat that both are “equally difficult politically.”

These are highly contentious proposals among EU policymakers, many of whom are also adamant that the recovery fund was a one-off.

The IMF is convinced, however, that a rainy-day fund would allow capitals to sort out their finances and meet the coming challenges of climate change. EU capitals have until the end of 2023 before the SGP comes back into force. They better figure it out before then.

“Further delays would force countries to go back to the old rules with all of their problems,” the blog post said. “The opportunity should not be wasted.”

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