By Jan Strupczewski
BRUSSELS (Reuters) -The European Commission proposed on Wednesday that, under a reform of the EU's fiscal rules, governments should ensure public debt falls by an individually negotiated amount over four years and stays on a downward path for a decade afterwards.
The proposal, which sets no numerical target for how much the debt should fall, immediately drew criticism from the EU's biggest country Germany, which wants a 1% of GDP minimum annual debt reduction target for all of the EU's 27 countries.
The Commission, wary of different debt sizes in the bloc that range from more than 170% of GDP in Greece or 145% in Italy to 19% in Estonia or 22% in Bulgaria, wants to move away from one-size-fits-all rules, like the current one which calls for annual debt cuts of 1/20th of the excess above 60% of GDP.
But German Finance Minister Christian Lindner said the EU proposal did not satisfy Germany because there were no minimum numerical targets for debt cuts that would be binding for all.
The proposal was a basis for further negotiations, he said.
France on the other hand was quick to back the EU executive.
"Our position on this is different from that expressed by Christian Lindner," a French official said. "The idea that there should be a single rule for all seems to us rather to go against the philosophy of the reform. The spirit of this proposal must not be distorted," the official said.
The proposed individual debt reduction would be the outcome of a four-year plan of reforms, investment and fiscal measures that would be agreed by the Commission and each government and target annual net expenditure as the key operational indicator.
REFORMS CAN WIN MORE TIME
Governments could get more time to reduce their debt and deficit, for instance seven years, if they implement reforms that increase fiscal sustainability, boost growth or invest in areas that are EU priorities like the transition to a green and digital economy, social rights or in security and defence.
Under the Commission proposal, countries with public debt above the EU's ceiling of 60% of GDP would be allowed to raise their annual net expenditure, which excludes one-offs, cyclical unemployment spending and debt servicing costs, by less than the medium-term output growth, to make sure debt falls.
The government deficit, like in existing rules, will have to stay below 3% of GDP. If it is above that ceiling, it will have to be cut by 0.5% of GDP every year until it is below the limit.
"And no heel-dragging, no backloading: member states will not be allowed to push back fiscal adjustments to a later date. This also applies to carrying out required reforms and investments," Commission Vice President Valdis Dombrovskis said.
To make sure governments do not postpone cutting the deficit and debt to the end of the agreed period, especially if it is extended to seven years, they would be required to implement 4/7th of the agreed adjustment by the end of the four years.
The deficit reduction, just like the debt reduction, would have to be achieved over the four-year period and measures used to achieve it would have to ensure that the deficit stays below 3% for 10 years afterwards without any additional steps.
The Commission's proposal is the fourth revision of the EU fiscal rules, called the Stability and Growth Pact, since the creation of the euro currency. The rules are designed to underpin the value of the euro by limiting government borrowing.
The new rules are to replace the existing ones, which have been suspended since 2020 because of the COVID-19 pandemic and the challenge of fighting climate change and the war in Ukraine, but which are to be reinstated from the start of 2024.
The Commission proposal will now have to be discussed by EU governments and negotiated with the European Parliament with a view to an agreement later in 2023.