EU ministers prepare for fiscal talks endgame

This text will form the basis for a final approval at the next meeting in December, a diplomat told EUobserver anonymously. "Most countries see the need to wrap things up," said the diplomat, adding that it is still not certain countries will be able to reach common ground before the end of the year.

The Spanish proposal introduces a guarantee that national deficits would stay below three percent deficit after four to seven years [by a common margin, although it is still unclear how close to zero that number will be.]

This has already been hailed as a win for German finance minister Christian Lindner, who has pushed for ever-stricter rules for most of this year.

Before the nitty gritty, a short recap: the reform of the so-called Stability and Growth Pact has been intensely debated for years. Since the Covid-19 pandemic hit in March 2020, Europe's fiscal rules have been temporarily suspended.

If no agreement can be reached before the end of the year, the old rules, which limit debt to 60 percent of gross domestic product and deficits to three percent are expected to come back into effect.

Reintroducing these hard limits would curtail spending capacity for most countries in the coming years but would be especially limiting for France and Italy, whose 2024 deficits are projected at 4.4 percent and 4.3 percent respectively — exceeding the three percent limit.

The EU Commission proposed a plan last April for a more tailored approach. The 60 percent debt ratio and three percent deficit limits remain, but member states have four years to bring debt on a downward slope, which can be extended to seven years.

"Public debt increased in the last 25 years," economy commissioner Paolo Gentiloni said in August when he defended the need for more flexible rules.

France versus Germany

The Spanish compromise is another iteration of the commission proposal, which tries to bridge the gap between French and German demands.

The budget plans, as proposed by the commission, are tied to investment plans to leave space for increased spending during economic downturns — a French demand.

National governments would draw up these plans in collaboration with the commission based on so-called debt-sustainability-analysis (DSAs).

The assumptions these analyses would be based on, however, are still contested and opaque. This has led to criticism that national governments could use more optimistic growth assumptions than the commission, which could result in debt not actually reducing.

Under pressure from the so-called 'frugal' countries, the commission proposal had already included the requirement for governments to reduce deficits by 0.5 percent annually until they reach the three percent limit.

But Lindner has insisted more must be done to ensure debt is reduced, which brings us to the Spanish compromise.

While Lindner wants to ensure all countries aim for lower deficits than three percent and has demanded an annual one-percent debt-reduction minimum per 2024, irrespective of the economic situation, France and Italy strongly oppose such hard limits.

Other traditionally frugal countries like Denmark, Sweden and the Netherlands largely support stricter debt-reduction and have similarly called for "common safeguards" — but have been more willing to compromise and have not insisted on annual debt reduction minimums starting in 2024.

Denmark's proposed minimum debt reduction safeguards would kick in only after the end of the four to seven-year period, but Germany has rejected this.

"We believe that negotiations are more fruitful if you allow for some compromise and not enter every debate with an unmovable demand," one diplomat told EUobserver.

Climate targets

Mostly discussed outside the confines of these ministers' meetings is the question whether countries can still achieve climate investment goals under the proposed plans.

Although still a moving target, the European Trade Union Confederation calculated in May that even the more flexible commission proposal would result in a minimum of €45bn in cuts in 2024.

The countries most affected would be Belgium (€2.5bn), Spain (€6.6bn), France (€13.2bn) and Italy (€9.5bn).

And a recent study by the think-tank New Economics Foundation (NEF) shows that only Sweden, Ireland, Denmark and Latvia would be able to meet their climate commitments under these rules.

Further debt-reduction targets "would undermine the whole logic of the initial commission proposal," said Sebastian Mang, a senior policy officer at NEF.

In June, the European Court of Auditors also warned that the EU is at risk of failing to meet its 2030 climate change targets due to insufficient public spending.

Critics point to a recent IMF report that shows that every euro of green investment increases economic output by 1.8 percent after one year.

Based on these assumptions, NEF calculated that EU countries can increase green investments by at least €135bn per year, with debt still falling by the 2030s.

"The debt and deficit discussion focuses too strongly on benchmarks," said Katja Reuter, who is a senior advocacy officer at Social Platform, an EU Commission-supported civil society organisation in Brussels.

"The additional German push to add an annual debt-reduction target could mean a return to austerity, which will leave millions worse off," she warned.