EU faces debt-rule showdown
December 23, 2021 - Massive public borrowing to fund pandemic rescue efforts is forcing a rethink of the European Union’s Stability and Growth Pact. Proposed changes to the SGP are exposing EU political fault lines.
Italian Prime Minister Mario Draghi and French President Emmanuel Macron are pushing to free their economies from the EU’s pre-pandemic SGP rules governing debt and deficits.
The SGP caps deficits at 3% of gross domestic product and debt at 60% of GDP. Violators are subjected to a maximum fine of 0.5% of GDP.
The SGP was adopted at the behest of the Germans, who sought to enforce spending restraint on their more profligate southern neighbours.
In March 2020, the European Commission activated a general escape clause in the SGP, allowing member governments to spend considerable sums to counter the economic pain of the Covid pandemic. In 2021, the Commission announced that these rules would remain suspended until 2023.
Christian Lindner, Germany’s new finance minister, told journalists on Tuesday (December 21) it would be “advisable” for the eurozone “to remain committed to the idea of stability.” Lindner said government debt must not dictate SGP monetary policy. Italian Prime Minister, Mario Draghi, says SGP rules are “obsolete.”
Meanwhile, Klaus Regling, the European Stability Mechanism chief, said in October that the SGP’s 60% ceiling on the ratio of public debt to GDP “is no longer relevant.”
Economists at the European Stability Mechanism have suggested that governments consider a higher debt ceiling of 100% of GDP.