EU Starts Work on Fiscal Reform After Covid Spending Splurge

(Bloomberg) -- The European Union began work this week revising its fiscal rules as it considers new exceptions to allow for the massive investments needed to help member states make their economies more climate friendly.

The European Commission, the bloc’s executive arm, launched a public consultation on the so-called Stability and Growth Pact, a fiscal framework that dictates countries’ debt and deficit levels. The EU suspended the SGP in March of 2020 to give member states the flexibility to react to the Covid-induced recession. 

The commission said that it will draw lessons from the pandemic and invited stakeholders to provide feedback so a consensus could be built on the economic governance framework.

“The powerful fiscal support provided during the pandemic has led to higher debt levels,” the EU’s economy chief, Paolo Gentiloni, told reporters on Tuesday. “These challenges make it all the more essential to have a transparent and effective fiscal framework.” 

The SGP requires countries to aim for budget deficits of less than 3% and debt burdens below 60% of gross domestic product.

The path forward, however, isn’t clear as EU member states remain deeply divided over whether the strict rules should be relaxed. Furthermore, changes to the SGP require a majority of member states to agree, and in some cases unanimity. 

A group of eight member states warned in September that adaptations of the rules are worth discussing “only if new proposals do not jeopardize the fiscal sustainability.” 

As a first step, the commission will put forward new fiscal guidance during the first quarter of 2022 that will take into account the high levels of public debt in the EU when setting debt reduction targets for 2023.

“We all know that we have to keep a supportive fiscal stance and, at the same time, make this support more selective,” Gentiloni said.

The EU executive is also willing to explore a permanent review of the rules that require ambitious efforts to balance the public accounts for euro members. 

“If the gap between the reality and your rules is very great, you have to address this issue if you want common rules,” Gentiloni added.

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