France, Italy Call for EU Fiscal Reform to Boost Investment

(Bloomberg) -- France and Italy have called for more favorable treatment of investments that foster long-term growth, marking the opening move in what could be a battle to overhaul the European Union’s fiscal rules.

“We need to have more room for maneuver and enough key spending for the future and to ensure our sovereignty,” French President Emmanuel Macron and Italian Prime Minister Mario Draghi wrote in a joint op-ed article published by the Financial Times on Thursday.

The two nations recently cemented their alliance with the symbolic signing of a cooperation treaty, and both leaders have called for revisions of EU budget rules, which are suspended until the end of 2022 due to the pandemic. 

Still, any changes will need the support of German Chancellor Olaf Scholz, who met with Draghi in Rome earlier this week. The German leader has argued that the current framework already offers ample flexibility. An official in Macron’s office said Scholz had been informed of the op-ed, as were other EU leaders.

A separate paper co-authored by Draghi’s and Macron’s economic advisers proposes to gradually transfer national public debt accumulated in combating the pandemic to a European agency with the aim of lowering borrowing costs for highly indebted countries. It also argues that the so-called Maastricht criteria -- maximum 60% debt to GDP ratio and 3% deficit -- should be replaced by customized ratios for each country tailored to their circumstances, leading to more realistic repayment rates.

The authors reckon one of the difficulties in implementing the plan would be how to differentiate between expenditures contributing to what they call “European public goods,” such as the green transition which should be prioritized, and other spending. Still, they added that this work was carried out after the EU launched its post-Covid investment program, underpinned by European Commission scrutiny.

In a nod to Germany and northern European countries, Macron and Draghi acknowledged that “we must bring down our levels of indebtedness.” Germany leads a group of EU members that have expressed concerns about out-of-control spending if rules are relaxed. But the two leaders also stressed that the current fiscal framework is “obscure and excessively complex.”

High debt levels can’t be lowered “through higher taxes or unsustainable cuts in social spending, nor can we choke off growth through unviable fiscal adjustment,” the leaders wrote in the Financial Times. “Our strategy is to curb recurrent public spending through sensible structural reforms.”

Macron, who takes over the rotating presidency of the EU Council in January, plans to hold a summit in March to focus on fiscal reforms.

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