EU converges on principles for new debt settlement, but details are lacking

By Jan Strupczewski

BRUSSELS, March 14 (Reuters) – European Union finance ministers agree on broad principles for reforming European tax rules to better adapt them to post-COVID economic reality, but crucial details remain to be seen. negotiate, according to a document.

Draft conclusions from a meeting of 27 EU finance ministers on Tuesday show that countries in the bloc support much of the European Commission’s proposal presented last November, but its practical application remains a challenge.

According to the proposal, the EU’s current limit of 3% of GDP for the budget deficit and 60% of GDP for the debt would remain unchanged.

The most indebted States would negotiate with Brussels individual debt reduction trajectories linked to reforms and investments, derogating from a single rule of annual debt reduction of 1/20 of the overrun above 60% of GDP.

Given that many EU countries have a debt well above the community limit, they would have between four and seven years to place it on a downward trajectory which would be negotiated with Brussels on the basis of a sustainability analysis of the debt by the European Commission.

Debt would be gradually reduced through limits set on annual net primary expenditure – spending that excludes one-time income, interest or cyclical unemployment payments – under the direct control of the state.

It would be an improvement on the unobservable, subject to review structural deficit that the focus is now on and that finance ministers deeply loathe.

A state could negotiate more time to reduce its debt if it promises reforms and investments that boost growth or resilience, strengthen public finances or respond to EU strategic priorities such as the green and digital transition or the defense capabilities.

In the event of disruptions to the economy beyond a state’s control, there would be an “escape clause” that would allow it to temporarily deviate from the agreed debt reduction deal, although it would have to be approved by other states.

MISLEADING DETAILS

While EU finance ministers agree on these points, there are also many they disagree on.

The main one is the methodology of the European Commission’s debt sustainability analysis, on which a large part of the debt reduction agreement will depend and which will limit the borrowing and spending capacity of the States.

Equally contentious is whether there should be numerical benchmarks for debt reduction that are common to all countries, even if they negotiate individual tracks, and if so, what should they be.

Other open questions are the requirements of the new framework for countries that do not have major debt problems, how to define the expenditure aggregate, when exactly a State should have more time to reduce debt and how to apply agreed plans.

Once finance ministers agree on general principles on Tuesday and EU leaders endorse them at their March 23-24 summit, the European Commission will start making concrete proposals on the remaining open issues. .

“This is where the real talks start,” said a eurozone official involved in the talks.

(Reporting by Jan Strupczewski; Editing in Spanish by Benjamín Mejías Valencia)