EU budget rules: ESM experts want 100 percent as the new Maastricht

The EU has changed its own budget and debt rules many times.

The Stability and Growth Pact, with the framework of which the member states could theoretically be punished for unsound budgetary policies, has been made more flexible several times.

The main purpose of this was to justify violations by the member states of the budgetary guidelines of the Maastricht Treaty - and to ensure that these are not subject to sanctions or fines.

Werner Mussler

Business correspondent in Brussels.

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In the past, the EU Commission often praised itself for interpreting the debt rules flexibly. Today, the incumbent Finance Minister Olaf Scholz (SPD) turns against another pact reform with the argument that the current rules are sufficiently flexible. The likely new coalition partners in Berlin have made a similar decision.

One thing is certain: the current regulatory framework has not prevented a significant increase in national debt since the Maastricht Treaty was signed in the early 1990s.

At that time, the average debt ratio in the euro area was 60 percent of gross domestic product (GDP); today it is around 100 percent.

Several economic crises were responsible for this, most recently the economic slump triggered by the corona pandemic and the associated additional government spending.

Greece, Italy, Portugal, Spain, Cyprus, France and Belgium are in some cases significantly above this debt average.

Does the EU treaty have to be changed?

The substantial increase in debts is the main reason that the EU Commission opened the discussion last week about a fundamental reform of the budget rules. For the first time, the Maastricht reference values ​​themselves are also up for debate, which up until now nobody has seriously wanted to touch. In a working paper published on Monday, economists at the euro crisis fund ESM, which is actually only marginally responsible, proposed raising the limit for national debt from 60 to 100 percent of GDP. The reference value for new borrowing of 3 percent of GDP is to remain.

At the same time, the ESM economists want to weaken the existing stipulations of the Stability Pact to reduce the high national debt. In principle, states should only be allowed to increase their spending by their trend growth - i.e. by their average economic growth. Countries whose national debts are above 100 percent of GDP should reduce them in the long term according to a path set by the EU Commission. That would be a weakening of the current - admittedly never observed - set of rules.

This generally stipulates that countries that do not comply with the 60 percent limit must reduce the difference to the reference value by one twentieth annually. When this rule was adopted in 2011, the Italian public debt was around 130 percent of GDP. Rome received several debt reduction guidelines from Brussels, but did not comply with them. Today the Italian debt ratio is around 155 percent. The ESM proposal means that the Commission will determine the long-term path to debt reduction as it sees fit.

The ESM economists justify their reform proposals mainly with the fact that the previous set of rules no longer does justice to economic reality. The current debt level can no longer be pushed below the 60 percent mark on average. At the same time, the debt sustainability of all euro countries is not jeopardized in view of the current low interest rates. In addition, the rules would have to be adapted to the needs of the heavily indebted countries. If the one-twentieth rule were to remain in place, Portugal would have to achieve an unrealistically high annual primary surplus - that is the budget balance excluding debt servicing - of 2.5 percent on average over the next 20 years.

In the opinion of the ESM economists, no changes to the EU treaties would be necessary for the reforms they propose.

The reference values ​​of 3 and 60 percent of GDP are not recorded in the contract itself, but in a protocol.

Protocols are considered to be legally binding components of the contract.

In the opinion of the ESM, however, the protocol to the budget rules can be changed more easily than the treaty itself. What would therefore be necessary would be “only” a unanimous decision by all 27 member states, but not ratification by the national parliaments.