EU considers individual debt reduction paths for EU countries

European Commissioner Valdis Dombrovskis presents a review of trade and sustainable development, in Brussels, Belgium, June 22, 2022. REUTERS/Yves Herman/File Photo

PRAGUE, September 10 (Reuters) – The European Commission will present proposals for changes to the European Union’s fiscal rules in the second half of October that could offer countries individual routes to debt reduction, the European Union said on Saturday. Vice-President of the Commission, Valdis Dombrovskis.

At a press conference after EU finance ministers met in Prague, Dombrovskis said the main purpose of the rules, designed to preserve the value of the euro, would remain to ensure the viability of public debt.

“This will require fiscal adjustment, reforms as well as investment,” Dombrovskis said, noting that public investment would likely receive more attention during the reform.

“These three elements must all be combined in order to achieve a realistic, gradual and sustainable reduction in public debt ratios,” he said.

EU rules state that public debt must be less than 60% of gross domestic product (GDP) and public deficits less than 3% of GDP. Read more

But the pandemic has left many countries with debt well over 100% of GDP, Greece at around 185% and Italy at around 150%. In contrast, Estonia has a debt of only 18.1%, Luxembourg 24.4% and Lithuania 44.3%.

“Given the diverging debt levels between member states, there can be no one-size-fits-all approach,” Dombrovskis said. “There can be more leeway for member states, but under a common set of rules,” he said.

This would be a departure from the current rule that all countries must reduce their debt each year by one-twentieth of the surplus above 60% of GDP – a requirement far too ambitious for highly indebted countries.

“The rules must be clear and enforceable, which means they must be realistic,” said Czech Finance Minister Zbynek Stanjura, who hosted the meeting. “So whatever changes we make, we have to figure out what’s realistic.”

In a nod to Germany and some northern EU countries, the Commission will propose stricter enforcement of the rules in cases of non-compliance, Dombrovskis said, as past practice has shown that compliance rules was not a priority for some.

The Commission will also propose to simplify the rules by focusing on a single observable indicator, such as the expenditure criterion, Dombrovskis said.

The spending benchmark is a rule that allows governments to increase spending each year based on the economy’s potential growth rate – the rate at which an economy grows without generating excessive inflation.

So when the economy is growing faster than its potential and overheating, lower spending helps cool it down. When the economy grows below its potential, higher government spending helps it catch up.

Reporting by Jan Strupczewski Editing by Mark Potter

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