Euro zone mulls how to make governments respect EU fiscal rules

[January 17, 2022]  By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone finance ministers will start a discussion on Monday on how to change the often-broken EU fiscal rules so that governments actually observe them, a euro zone official said.

The European Union's Stability and Growth Pact is meant to stop governments borrowing too much in order to safeguard the value of the euro common currency. 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 discussion is starting from the realisation that sanctions have not seen that much use. No use, to be precise," the senior euro zone official 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.

EU flags flutter in front of the European Commission headquarters in Brussels, Belgium October 2, 2019. REUTERS/Yves Herman//File Photo

"After the financial crisis, there was a lot of emphasis on stronger enforcement, greatly related to the turmoil on financial markets and market pressure," the official said.

"This time we live in a very different world and the whole debate is shaping differently - it is not about how to strengthen enforcement, but how to adapt the framework so that it recognises certain lessons learned and accommodates the new political priorities that have emerged."

Those include a huge EU investment plan to "green" the economy to prevent climate change, for which some argue EU fiscal rules should provide an incentive.

After the COVID-19 pandemic, some euro zone countries are also saddled with large public debt that cannot be reduced in line with current requirements without plunging their economies into recession, so a new debt reduction rule is needed.

Some ideas include setting individual debt reduction paths for each euro zone country rather than a blanket rule for all.

"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.

(Reporting by Jan Strupczewski; Editing by Catherine Evans)

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