Brussels Relaunches Reflection on Easing Fiscal Rules in the Euro Area

The European Commission launched a consultation on Tuesday on reforming deficit and debt rules for euro area member states. Given the extent of disagreements between countries on these subjects, achieving an “ambitious” overhaul of the Stability and Growth Pact, as the European executive wishes, is a challenge.

This reflection had already been initiated in February 2020, on the eve of the surge of the Covid-19 pandemic. A month later, the need to face an economic tsunami had shattered all the budgetary rules, which were urgently suspended for 2020. The exemption clause was renewed for 2021 and then 2022. In 2023, the rules must come into effect in force. But what rules?

Squaring the circle
In the aftermath of a crisis where massive state support saved economies from disaster, the criteria of a maximum 3% of GDP deficit and 60% debt appear to many to be obsolete. Deficit which has become a criterion for avoiding excessive deficits”, welcomes Valdis Bombrovskis. But the Latvian official stresses all the same that “if we look at our current prism, the weaknesses that we identified two years ago are even more relevant.”

This question risks immediately rekindling the divide between the north and the south of the continent. The prospect of a compromise therefore still seems remote. The rate of annual debt reduction is simply unrealistic for some member countries like Italy and Greece, which have deficits estimated at 160% and 200% of gross domestic product (GDP) respectively. “We found that some southern countries would need to make a huge tax adjustment effort of the order of 5 to 6% of GDP (…) which is simply inconceivable”, explains Zsolt Darvas, researcher at the Bruegel institute.

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Brussels Relaunches Reflection on Easing Fiscal Rules in the Euro Area - /10

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