Fiscal rules: Germany and the Netherlands push for minimum debt reduction targets for EU countries

The ongoing reform of the European Union’s fiscal rules has taken a new turn after Germany and the Netherlands came forward with demands for minimum debt reduction targets, directly challenging the European Commission’s approach based on tailor-made national plans.

EU law requires countries to keep their budget deficit below 3% of gross domestic product (GDP) and public debt below 60% in relation to GDP but many countries exceed those thresholds after years of intense spending to cushion the impact of the COVID-19 pandemic, Russia’s war in Ukraine and the energy crisis.

The European Commission argues this new economic reality warrants a reform of the bloc’s fiscal rules and has taken the first steps to revise the current framework.

In a report published last November, the Commission proposed to keep both the 3% and the 60% targets untouched but add greater flexibility so that governments can adapt the objectives to the specific circumstances of their countries.

Under the plan, EU states would negotiate their own national blueprints with Brussels to control public deficit and gradually decrease debt across a four-year period.

Highly indebted countries like Greece and Italy could be granted an extra three years to adjust their finances and return to “prudent” fiscal policies.

In a notable change, the norm that imposed a uniform 1/20th rate of debt reduction would be scrapped and replaced by unique pathways. This norm has been criticised for forcing painful sacrifices and exacerbating economic crises.

But Germany and the Netherlands, two countries known for advocating fiscal moderation, disagree with this approach and are now demanding minimum targets for indebted countries.

In a non-paper seen by Euronews, Germany makes the case for a one-size-fits-all rule that should guarantee a decline in debt levels of an “appreciable magnitude.”

This “common safeguard” would compel countries that have a debt ratio above 60% of GDP to reduce their debt levels by at least 0.5% per year.

Countries well above that threshold would need to reduce their debt by at least 1% per year, according to the German document.

“The current ideas of the Commission should be amended in a way that the medium-term fiscal plans lead to a (sufficient) decline in high debt ratios in each year… it should also be ensured that an actual reduction in debt ratios on an annual basis is achieved,” the non-paper says.

Germany also suggests “simple and transparent” rules to manage public expenditure and a provision to automatically trigger a new reform process if high debt persists.

“If the reformed framework does not achieve a reduction in the debt ratios, it must be revised after a maximum period of four years,” the non-paper says.

Days after the German document leaked to the press, Dutch Finance Minister Sigrid Kaag threw her support behind the idea of a “common numerical benchmark” to prevent country-specific plans from becoming “idiosyncratic.”

“We think it is very important that there is variance, that there is space for reform and investments, but of course, debt reduction needs to be tangible and needs to be measurable,” Kaag told the Financial Times.

“We want sufficient debt reduction.”

Kaag, however, did not specify the annual ratios, as Germany did in its non-paper.

Euronews reached out to the Netherlands finance ministry asking for more details.

In reaction to the statements, Veerle Nuyts, a European Commission spokesperson, said Brussels would unveil legislative proposals “in the coming weeks” to advance the political debate but refused to say whether the proposals would feature the minimum targets advocated by Germany and the Netherlands.

“The ultimate aim is to ensure a broad consensus on this important topic,” Nuyts said, noting engagement with governments continued on “remaining open issues.”

She also said the conclusions from last month’s meeting of economic and finance ministers, which included a reference to “the appropriateness and design of common quantitative benchmark,” provided a “solid foundation” for the Commission’s work.

Brussels is determined to conclude the reform process by the end of the year and have the new fiscal rules in place by January 2024, an ambitious goal also shared by member states.

The new framework is expected to take into account the enormous injection of cash needed to speed up the EU’s green and digital transition, a dual effort estimated to cost €650 billion in additional investments per year until 2030.

EU countries have spent the last months discussing how to strike a balancing act between strong investments and sustainable debt reduction, with no clear answer in sight.

The Commission, meanwhile, has decided to delay fines for non-compliant countries until next year.

At the end of the third quarter of 2022, government debt stood at 93% of GDP in the euro area and 85.1% in the European Union. Greece had the highest ratio, at 178.2%, followed by Italy with a 147.3% rate.

In that same period, German debt stood at 66.6% of GDP, while the Netherlands had a 49% rate, according to Eurostat.