Euro zone eyes slower debt reduction rule, ways to boost compliance



* EU moves towards more realistic debt reduction pace

* Broad backing to move away from structural balance as indicator

* National 'ownership' of rules key to success (Recasts with Dombrovskis, Lindner comments)

By Jan Strupczewski

BRUSSELS, Jan 17 (Reuters) - European Union countries broadly agree they need to change EU laws to allow slower debt reduction, move away from complex calculated indicators and come up with an EU fiscal framework that is actually respected, senior euro zone officials said.

The EU's fiscal rules, called the Stability and Growth Pact, are to stop governments borrowing too much to safeguard the value of the euro. But the rules have often been disregarded, leading in part to the 2010 sovereign debt crisis, with little attempt made to enforce them by applying financial penalties.

The rules are now under review because the COVID-19 pandemic boosted EU public debt so much that existing laws can no longer apply, while fighting climate change requires enormous investment over decades that many argue should be reflected in EU laws.

"Some areas of broad agreement seem to be emerging concerning the more gradual adjustment path of debt reduction and specifically the so-called 1/20th rule," European Commission Vice President Valdis Dombrovskis told reporters on Monday.

The current rule is that governments must cut public debt every year by 1/20th of the excess above 60% of GDP. With many countries running debts well above 100% of GDP, such a rule is seen as unrealistic by finance ministers.

"We need credible debt reduction pathways. But they also need to be realistic and allow for green and digital transition," Dombrovskis said on entering a meeting of euro zone finance ministers who will discuss changes to the rules.

But a slower pace still meant that debt would have to fall, Germany's finance Minster Christian Lindner said.

"Now it's the time to build up fiscal buffers again, we need resilience not only in the private sector, but also in the public sector," Lindner told reporters on entering the talks. "That's why I'm very much in favour of reducing sovereign debt."

Dombrovskis said there was also broad agreement that the rules need to be simplified and that their focus should move away from indicators like output gaps and structural balances that cannot be directly observed but have to be calculated and are often substantially revised.

Finally, the ministers want to agree on changes that would make governments observe the rules because it is beneficial, rather than because of potential financial sanctions, which are seen by many as an empty threat.

"The discussion is starting from the realisation that sanctions have not seen that much use. No use, to be precise," a senior euro zone official involved in the preparation of the meeting said.

To appease financial markets as the debt crisis peaked, euro zone countries agreed in 2011 to make financial sanctions for running excessive deficits and debt more automatic and less subject to political discretion.

They also introduced the possibility of fines for governments not addressing other economic imbalances such as an excessive current account gap or surplus.

But despite continued breaches of the borrowing rules by France, Italy, Spain or Portugal and Germany's persistently large current account surpluses, the European Commission has never moved to punish any country, discrediting fines as a credible instrument of enforcement.

"There is recognition this time that implementation of the rules depends on national ownership. There is strong agreement on this and much of the discussion goes on how to strengthen ownership," the senior official said.
Additional reporting by Michael Nienaber in Berlin; Reporting by Jan Strupczewski; Editing by Catherine Evans and Toby Chopra

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.