Eurozone mulls slower debt reduction rule, ways to boost compliance

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BRUSSELS – European Union countries generally agree that they need to change EU laws to allow for slower debt reduction, move away from complex calculated indicators and come up with an EU fiscal framework that is really respected, senior eurozone officials said.

EU fiscal rules, called the Stability and Growth Pact, must prevent governments from borrowing too much to preserve the value of the euro. But the rules were often ignored, leading in part to the 2010 sovereign debt crisis, and few attempts were made to enforce them through financial sanctions.

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The rules are currently being revised as the COVID-19 pandemic has inflated EU public debt so much that existing laws can no longer apply, while tackling climate change requires huge investments on decades that many believe should be reflected in EU laws.

“Some areas of general agreement seem to be emerging regarding the more gradual adjustment path of debt reduction and in particular the so-called 1/20th rule,” the Commission vice-president told reporters on Monday. European, Valdis Dombrovskis.

The current rule is that governments must reduce public debt each year by 1/20th of the surplus above 60% of GDP. Given that many countries have debts well in excess of 100% of GDP, such a rule is seen as unrealistic by finance ministers.

“We need credible paths to debt reduction. But they must also be realistic and enable a green and digital transition,” Dombrovskis told a meeting of eurozone finance ministers that will discuss rule changes.

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But a slower pace still meant debt was set to fall, German Finance Minister Christian Lindner said.

“Now is the time to rebuild fiscal buffers, we need resilience not only in the private sector but also in the public sector,” Lindner told reporters as he entered the talks. “That’s why I’m very much in favor of reducing sovereign debt.”

Dombrovskis said there was also broad agreement that the rules need to be simplified and that their focus should shift away from indicators such as output gaps and structural balances which cannot be directly observed but must be calculated and are often significantly revised.

Finally, ministers want to agree on changes that would force governments to play by the rules because it is beneficial, rather than because of possible financial penalties, which are seen by many as an empty threat.

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“The discussion starts from the observation that the sanctions have not been used so much. Needless, to be precise,” said a senior eurozone official involved in the preparation for the meeting.

To appease financial markets as the debt crisis reached its climax, eurozone countries agreed in 2011 to make financial sanctions for excessive deficits and debt more automatic and less subject to political discretion.

They also introduced the possibility of fines for governments that fail to address other economic imbalances such as an excessive current account gap or surplus.

But despite continued breaches of borrowing rules by France, Italy, Spain or Portugal and Germany’s persistent current account surpluses, the European Commission has never taken action to punish a country, discrediting fines as a credible enforcement tool.

“It is recognized this time that the implementation of the rules depends on national ownership. There is strong agreement on this and much of the discussion is about how to build ownership,” the senior official said. (Additional reporting by Michael Nienaber in Berlin; Reporting by Jan Strupczewski; Editing by Catherine Evans and Toby Chopra)

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