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Good news for France and Italy as Brussels looks to keep debt rules on ice in 2023

The European Commission will keep its debt rules on ice next year when the EU’s fiscal framework is supposed to come back into force, according to a draft guidance obtained by POLITICO.

The guidance, if left unchanged, will come as a great relief to France, Italy and Spain, which are among a half-dozen EU countries that will come out of the pandemic with even heavier debt burdens. Brussels paused the rules in March 2020 so that treasuries could prevent an economic fallout from the pandemic without fear of punishment, with the idea of reintroducing the framework starting in January 2023.

The Commission’s new message, in a nutshell: The EU’s executive arm will be lenient — provided that governments get their finances under control and start chipping away at their debt.

The Commission plans to present its new fiscal policy guidance to capitals in early March so they can begin planning their draft budgetary plans — an exercise Brussels also carried out last year.

The document is a nod to the difficulties of reinforcing the so-called Stability and Growth Pact (SGP) in the post-pandemic world. Countries spent heavily to prevent mass unemployment and bankruptcies amid national lockdowns, pushing debt levels up across Europe.

The SGP would normally cap budget deficits to 3 percent of economic output and try to limit public debt to 60 percent. Countries with debt levels above that threshold would have to reduce the difference at a rate of 5 percent a year.

But plans have long been in place to reform the rules, and proposals to tweak them had already been due this summer. The Commission sees no reason to enforce the SGP’s debt rules in full when they could soon change anyway, the document suggests.

“Pending the outcome of the economic governance review, the Commission will not enforce the debt reduction benchmark as it is currently formulated,” the draft said. “However, the Commission will continue to monitor debt developments in line with the Treaty requirements.”

The Commission’s delicate balancing act is complicated by rising energy prices and the rapid spread of Omicron. The double whammy has acted as a drag on the bloc’s growth to the point that the International Monetary Fund recently downgraded its predictions for eurozone growth this year by 0.4 percentage points to 3.9 percent.

Paolo Gentiloni, the Commission’s economy chief, will present his new forecast on Thursday morning. Everything is, of course, subject to change ahead of publication: Factors in flux include rising tensions between the West and Russia over Ukraine and the continued risk of new coronavirus variants emerging. Continued uncertainty nonetheless serves as good reason to ease the SGP’s debt rule in before changing it, according to Gentiloni.

“We have seen the effects of tightening too soon, of austerity measures, all too clearly in the aftermath of the last crisis, a decade ago,” the Italian said in a speech on Tuesday at Bocconi University. “I believe the rules should be reformed to make sure high debt levels are brought down in a more gradual and realistic way, without choking growth.”

New realities

Among the most affected states are Belgium, Cyprus, France, Greece, Italy, Spain and Portugal, which all have debt piles above 100 percent of GDP. Enforcing the rules as they stand would trigger a new age of austerity, akin to the policies after the financial meltdown of 2008 that pushed the eurozone into a sovereign debt crisis and called for a string of bailouts.

Such a repeat would prove disastrous for Europe’s recovery and undermine the continent’s expensive battle against climate change. These post-pandemic realities have prompted calls from capitals, think tanks and academics to loosen the rules so that treasuries can manage their debt while investing in green projects to reduce greenhouse gas emissions.

“Ensuring a gradual fiscal adjustment in high-debt Member States is necessary to stabilize and then reduce debt ratios, while too abrupt a consolidation could negatively impact growth and, thereby, debt sustainability,” the 11-page document said.

However, the Commission will be stricter in enforcing the bloc’s 3-percent cap on annual budget deficits unless treasuries can demonstrate how they plan to rein in their spending.

Offending countries risk falling into the excessive deficit procedure (EDP), a red-flag label for countries in breach of the EU’s budget deficit rules. Indebted countries shouldn’t mistake leniency for weakness, either, the text warned, stating that “the Commission will retain the possibility of opening of a debt-based EDP if debt is not sufficiently diminishing.”

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