We need to strengthen EU fiscal rules, not dilute them

The writer is Germany’s minister of finance

Sound public finances are a prerequisite for enabling economic growth in the EU. We need to ensure that we have fiscal buffers for potential future crises. This is particularly true after the past few years, in which all member states have made financial efforts to cope first with the pandemic and then with the consequences of the Russian war of aggression on Ukraine.

Europe’s Stability and Growth Pact has not sufficiently fulfilled the hopes placed in it so far. We need clear fiscal policy rules, ensuring sound public finances within the EU, and we have to improve their enforcement. Currently, we are in discussions on the future design of the common European fiscal framework. Our aim is to strengthen the Stability and Growth Pact, not to weaken it. We need more accountability.

The European Commission presented initial ideas on a potential reform in November. But these ideas do not yet sufficiently define clear requirements for reducing deficits and debt ratios or keeping them at sufficiently low levels. For example, the commission suggests the introduction of bilateral procedures between it and member states when it comes to debt-reduction plans.

Based on a so-called debt sustainability analysis, the commission would suggest a member state’s spending path for the next four years as a basis for further bilateral discussions. But such analyses are very sensitive to changes in the underlying assumptions about debt and, in the end, would make the issue of debt reduction a subject of political negotiation.

Instead of bilateral procedures and negotiations, we need a functioning system of fiscal rules that leads to equal treatment of all member states. The multilateral character of EU fiscal surveillance has to be maintained. This is the only way to preserve a common understanding of sound public finances in the bloc.

Common fiscal rules have to ensure a rapid and sufficient reduction of deficits and high debt ratios, while allowing for necessary public and private investment. Improving the quality of public finances by prioritising spending remains key.

To live up to these goals, the reference values of 3 per cent of gross domestic product for the deficit ratio, first set out in the Maastricht treaty, and 60 per cent of GDP for the debt ratio must remain untouched. The excessive deficit procedure in the event of a breach of the 3 per cent deficit criterion has been our most effective enforcement tool in the past. It must not change.

We are convinced that comprehensible and commonly agreed numerical benchmarks are a minimum requirement for ensuring declining debt ratios and equal treatment. We need a simple and transparent expenditure rule for deficit reduction that limits spending based on the economic growth potential of a member state. In addition, safeguard provisions to ensure an actual decrease in debt ratios exceeding the Maastricht reference values in each year are needed. We also need further measures to ensure compliance by member states, as well as less discretion in the interpretation and application of the rules.

The commission has made “national ownership” of the fiscal framework one of its reform goals. But this can only be achieved if all member states identify with its core elements. Reform must make the rules clearer. Furthermore, enforcement, as well as rulemaking, is crucial. The rules and regulations cannot be a paper tiger. Germany will evaluate the commission’s legislative proposals, which we expect very soon, on this basis.

Reform of the Stability and Growth Pact cannot be an end in itself. It is only acceptable if we make significant improvements to the framework. Otherwise, changing the rules would not be advisable.