In light of the controversy over budget rules in the European Union, decision makers are preparing for a confrontation that may resonate for years to come. The huge debts of some governments, which have accumulated due to financing spending during the Corona pandemic crisis, require a review of the European Union rules governing government debt and deficit.

In a report published by the American "Bloomberg" website, writers Alessandra Migliacchio, Jorge Valero and Catherine Boselli say that Italian Prime Minister Mario Draghi and French President Emmanuel Macron are pressing to free their economies from the restrictions of the European Union, but their efforts are facing resistance from leaders of the Nordic countries.

Since the quarter-century-old European Pact for Stability and Growth is contained in a treaty, any amendments must be ratified by the 27 member states.

With the European Central Bank controversially completing its monetary policy renewal, the outcome of the upcoming battle over budget rules will determine the scope of fiscal policy for the next decade and perhaps the EU's growth outlook as well.

According to economist Mario Monti, a former EU commissioner and former prime minister of Italy, "many in southern Europe believe there should never be a real return to the rules."

"The high government deficit, which is largely covered by the European Central Bank, is the main engine of growth," adds Monti, who believes that structural reforms should take precedence.

rules and restrictions

The Stability and Growth Pact was formulated at the beginning of the adoption of the euro as a single currency at the request of the Germans, who sought to find a way to impose spending restrictions on their more extravagant southern neighbors, and the debt-to-GDP ceiling was 60%, and the deficit was 3%, and anyone who violates this rule Subject to penalties and fines.

These rules were put in place at a time when European leaders did not expect governments to be able to borrow at low interest rates - as is the case today - so economists believe this agreement is an unnecessary restriction.

In 2021, the European Commission triggered a clause in the agreement allowing member states to spend without restrictions during the pandemic, and these countries must now agree on new budget-control rules after the suspension deadline expires in 2023.

Austerity advocates want limited changes to the original rules of budgetary control, and they argue that the European Central Bank's massive purchases of government bonds as part of pandemic rescue efforts have left governments overly dependent on central bank support.

In contrast, the other camp, led by the Italians and the French as well as Spain and others, argues that the deal's strict limits are stifling economic growth and burdening them with debt.

These views reflect the economic consensus that crystallized after the Greek debt crisis over the past decade, in the wake of which the International Monetary Fund acknowledged that strict austerity measures imposed on Greece as a condition for debt relief, exacerbated the country's crisis.

On December 14, French Finance Minister Bruno Le Maire said - explaining the prevailing philosophy of the economies of the developed world - that "investment is what will boost growth, and the latter will, in turn, accelerate debt reduction."

But Lars Feld, a former member of Germany's Committee of Economic Experts and professor of economic policy at Albert Ludwig University in Freiburg, argues that such ideas have gone too far. "It's the same old line. The German government shouldn't succumb to pressure, but She has to ask what is being done to relieve the debt burden."

Austerity advocates want limited changes to the original rules of budgeting (Pixabe)

debt burden

Italian Prime Minister Mario Draghi - who has condemned the financial agreement on several occasions - believes that the rules of budget control are "outdated", and on November 26, he concluded a bilateral treaty with Macron pledging to intensify cooperation in a number of areas, including politics. Finance.

It was clear Draghi's contempt for these rules and for his government's proposed budget for the period between 2022-2024, which does not take into account the idea of ​​a return to the 3% deficit ceiling.

This sparked a November 24 call for "caution" by the European Union Commission, a view popular in the north of the Alps.

For his part, Gertrude Tumpel-Gogrel, a former Austrian member of the European Central Bank's executive board, says that "it was right to deal quickly with the Corona pandemic, but we need to return spending to more normal levels."

Among the proposals for change is one by economists at the European Stability Mechanism, who recommended in a research paper published in October that governments consider raising the debt ceiling to 100 percent of GDP — given that all major economies, Including Germany, it has long exceeded the 60% cap - and a more flexible approach to the deficit ceiling.

The European Finance Council - a panel of EU advisors - is calling for a slower pace of debt reduction to be allowed, recognizing the continuing need to "achieve clear and recognized fiscal targets", such as the controversial 3% budget deficit rule.

The discussions will undoubtedly be long and contentious, and France, which is about to take over the EU's rotating presidency, plans to hold a summit in March, while the Commission prepares to buy time by proposing interim financial targets for 2023.

According to Paolo Gentiloni, the European Commissioner for Economics and Finance, at a conference on November 28, “It was difficult to implement standards before, and you can imagine how difficult it is given the high levels of debt, we will discuss this issue a lot. In the coming months, in the meantime, it would be a grave mistake to ignore it."