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Bid to break EU debt rules deadlock fails to win German support

by editor

Germany is unconvinced about draft EU proposals circulated on Tuesday that would see governments such as France and Italy forced to reduce debt by a set amount each year, complicating already fractious negotiations over an overhaul of national spending rules.

In a bid to assuage Berlin’s concerns that reforms will be too lax, Spain, which holds the rotating presidency of the EU, drew up a compromise text that would impose conditions on the bloc’s most indebted nations. The document, dated November 28 and obtained by POLITICO, would compel countries with the highest ratios of debt-to-GDP to reduce it by an average of one percentage point per year over a set period.

It was the first time a number has been inserted after multiple rounds of drafting over many months.

The wrangle is just the latest episode in a yearlong saga that has reopened old eurozone divides between governments who want the ability to spend and accumulate debt and those who fear that without strict limits the currency bloc will topple back into the volatility that brought it to the brink just over a decade ago.

Getting a deal on the reforms, which finance ministers are rushing to do before the end of the year, is one of EU’s most pressing pieces of business as it grapples with a flagging economy, a drawn-out conflict in Ukraine and a European-wide election looming next year.

While governments are in broad agreement that the EU’s old debt and deficit rules were too rigid, Germany is leading a group of countries that believe there must still be some uniform conditions over the pace of debt reduction rather than tailor-made targets agreed between each government and the European Commission.

Deal at dinner?

But the latest proposal, which would cover countries with a debt-to-GDP ratio above 90 percent, still may not wash with Berlin, according to three EU diplomats involved in the negotiations, speaking on condition of anonymity because of the sensitivity of the talks. Governments with a debt-to-GDP ratio of between 60 percent and 90 percent would have to shrink it at an average annual rate of 0.5 percentage points, according to the document.

The debt reduction plans would cover a four or five-year period — depending on the parliamentary cycle of the country concerned, according to another document, previously obtained by POLITICO.

Deputy finance ministers discussed the measures on Tuesday and Germany’s reluctance to signal their willingness to agree to the latest draft compromise prompted some of them to question whether a deal can be struck as planned when finance ministers gather for dinner in Brussels on Thursday next week.

Without a deal, Brussels will reintroduce the rules that were suspended at the start of the COVID pandemic to allow governments to spend their way out of the worst recession since World War II and which nearly everyone agrees are now unworkable.

All that spending has left many countries with high public debt. Belgium, France, Greece, Italy, Portugal and Spain all have debt above 100 percent of economic output.

More pensioners

The EU treaties require countries to keep their debt levels closer to 60 percent of their economic output and limit their budget deficits to under 3 percent. That is not changing. The debate is over the pace of reduction and how strictly the rules should be enforced. 

The Commission would scrutinize each country’s debt-reduction plans while checking countries’ growth forecasts and debt sustainability, taking into account an aging population that will soon retire and start drawing a pension.

Officials say Commission officials are running the numbers in the latest draft and could come back to deputy finance ministers on Monday for more talks before ministers take over the debate.

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