The EU Commission wants to give highly indebted countries more flexibility in repaying irregular debts. Instead of uniform guidelines for all countries, in a reform proposal for the EU budget rules, the authority is focusing on individual paths for each country in order to reduce debt and deficits in the medium term. At the same time, violations should be punished more severely. “We are aiming for a simpler system of fiscal rules, with more ownership by countries and more scope for deleveraging – but combined with tougher enforcement,” Commission Vice-President Valdis Dombrovskis said when presenting the proposals on Wednesday.

The goals of the so-called Stability and Growth Pact of limiting debt to a maximum of 60 percent of economic output and keeping deficits below 3 percent remain in place. However, there should no longer be any uniform specifications, especially for achieving the 60 percent target. “It’s not a question of whether debt will be reduced towards 60 percent of gross domestic product, but rather how each country gets there and, above all, how quickly,” Dombrovskis said. His colleague Paolo Gentiloni said one cannot ignore the fact that debt levels differ between countries.

Rules suspended until 2024

The rules are currently suspended until 2024. Normally, states have to repay 5 percent of the debt that is above the 60 percent mark per year – for highly indebted countries like Italy or Greece that would be devastating for growth. But even before the pandemic, the complicated set of rules was often disregarded – including in Germany. “Almost every member state has broken the rules at some point,” Dombrovskis said. The aim of the reform is to make it enforceable again, said Gentiloni.

Federal Finance Minister Christian Lindner (FDP) said in Berlin that the proposals were “worthy of discussion”. At the same time, he was critical of the individual solutions for states. “A uniform monetary union also needs uniform fiscal rules.” That is why there cannot be a unilateral relaxation of rules or the creation of additional scope for assessment, said Lindner. The federal government will now take a closer look at the proposals and discuss them with the EU states.

Concrete proposals from the EU Commission

Specifically, the EU Commission proposes that the EU countries present plans on how they want to improve their finances. These would have to be approved by the EU Commission and the other countries. States with high debt would then have four years to credibly reduce their debt and reach the deficit target – states with lower debt would be more flexible. There is no specific deadline for the 60 percent target. “Countries with significant public debt would still have to reduce their debt faster than countries with less urgent problems,” Dombrovskis clarifies.

The plans should be based on the need for investments – for example in climate protection – and be partly linked to reforms. If a country has to invest a lot, it can get up to seven years. “The more reforms and investments that are proposed, the more steps there can be to deleveraging,” Gentiloni said. It was seen that with the austerity policy after the financial crisis, the required level of investments could not be maintained. “That’s something we need to change,” he said, particularly with regard to the money needed for the energy transition.

enforce rules more strictly

The EU Commission also wants to enforce the rules more strictly. The investment projects and reforms laid down in the plans are to be monitored and violations are to be punished more severely – for example if states do not reduce their debt or deficit as planned. Fines should be imposed more often for this. In an emergency, EU funds could be canceled.

So far, the proposals are only a discussion paper. First of all, the finance ministers are to discuss the proposals in December. If the paper is approved, the Commission could present a legislative proposal in the first quarter of next year. However, it is still unclear whether a consensus can be reached – also in view of Germany’s critical position.