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

By Jan Strupczewski

BRUSSELS (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)