Spain pitches new approach to EU fiscal reform, aiming for autumn deal

During a meeting of economic and finance ministers on Friday, Spain, which took over the six-term presidency on 1 July, proposed talks to be split into four “building blocks” with the goal of inking a deal sometime in autumn.

The blocks will focus on institutional balance, debt reduction, public investments and mechanisms to strengthen enforcement. The second section – the pace of how fast debt should be slashed – is poised to be one of the most explosive points of friction, as Germany and France defend diametrically opposing views.

“We will, as presidency, do the utmost to find the right balance and engage in earnest in political negotiations in the autumn so that we have the new fiscal rules in place by the end of the year,” said Nadia Calviño, Spain’s minister for the economy.

Ministers gave a “unanimous” endorsement to the Spanish outline and showed a “strong determination” to meet the autumn deadline, Calviño said. They also agreed to postpone discussions on the reform’s most contentious aspects until September, when Brussels will resume its policy-making cycle at full speed.

“We believe we can make rapid progress on the known areas of convergence and then focus on the key political issues immediately after the summer break,” said Valdis Dombrovskis, the European Commission’s executive vice-president, speaking by Calviño’s side.

The ongoing discussions are meant to overhaul the European Union’s intricate set of fiscal rules, known as the Stability and Growth Pact, and adapt them to the rapidly-changing economic landscape.

Under the current framework, member states are required to keep their budget deficits under 3% of gross domestic product (GDP) and their public debt levels below 60% in relation to GDP — thresholds that many governments exceed after years of intense spending to cushion a succession of overlapping crises.

The limits remain suspended as a result of the COVID-19 pandemic and Russia’s invasion of Ukraine, and their re-activation depends on the review process.

In its legislative proposal presented in late April, the European Commission kept untouched the 3% and 60% targets but made significant alterations to the way in which the two figures should be met.

Each member state would be asked to design a mid-term fiscal plan to cut down its deficit and debt levels at a sustainable and credible pace. The country-specific blueprints would be negotiated between the European Commission and national governments, and later approved by the EU Council.

The fiscal adjustments necessary to meet – or at least head towards – the 3% and 60% targets would be carried out over a period of four years, extendable to seven in exchange for further reforms.

This renewed focus on national ownership and flexibility has been welcomed by indebted countries like France, Italy, Spain and Portugal, but has raised suspicions from frugal-minded states, such as Germany, the Netherlands and Denmark, who fear governments would enjoy excessive leeway to rein in their public finances.

This last group is pushing to have stronger safeguards in the text that would reinforce equal treatment among capitals, regardless of their starting point, and ensure an across-the-board reduction in debt and deficit levels every year.

“We cannot allow debt levels to rise indefinitely from crisis to crisis. This would permanently overload public finances, which is particularly costly in times of rising interest rates,” said a group of 10 countries in an op-ed published last month.

“As far as the capital markets are concerned, debt is debt. Capital markets are not interested in the motives for taking on debt, however worthy they may be.”

But for member states dealing with extraordinary financial burdens, which in some cases exceed the 100% debt-to-GDP ratio, the concept of uniform safeguards evokes the spectre of painful cuts to public spending, reminiscent of the austerity measures that characterised the response of the 2007-2008 financial crisis.

France, in particular, has come strongly against the idea of automation and uniformity, arguing going down this road would lead to a recession and loss of productivity.