EU eyes individual debt reduction paths for EU countries

© Reuters. FILE PHOTO: European Commissioner Valdis Dombrovskis presents a review of trade and sustainable development, in Brussels, Belgium June 22, 2022. REUTERS/Yves Herman/File Photo

By Jan Strupczewski and Jason Hovet

PRAGUE (Reuters) - The European Commission will present in the second half of October proposed changes to European Union fiscal rules that are likely to offer countries individual debt reduction paths, Commission Vice President Valdis Dombrovskis said on Saturday.

At a news conference after EU finance ministers held talks in Prague, Dombrovskis said the main goal of the rules, designed to safeguard the value of the euro, would remain making sure public debt was sustainable.

"This will require fiscal adjustment, reforms as well as investments," Dombrovskis said, signalling government investment was likely get some more attention in the course of the reform.

"Those three elements should all be combined so as to achieve a realistic, gradual and sustained reduction in public debt ratios," he said.

EU rules say public debt must be below 60% of gross domestic product (GDP) and government deficits below 3% of GDP.

But the pandemic left many countries with debt well above 100% of GDP, with Greece at around 185% and Italy around 150%. On the other hand, Estonia has a debt of only 18.1%, Luxembourg 24.4% and Lithuania 44.3%.

"Given divergent debt levels across Member States, there cannot be a one-size-fits-all approach," Dombrovskis said. "There can be more leeway for Member States, but within a common set of rules," he said.

This would be a departure from the current rule that all countries have to cut their debt every year by one twentieth of the excess above 60% of GDP - a requirement that is far too ambitious for the high debt countries.

"Rules have to be clear, and they have to be enforceable, that means they have to be realistic," Czech Finance Minister Zbynek Stanjura, who hosted the meeting, said. "So whatever changes we make, we have to work out what is realistic."

In a nod towards Germany and some northern EU countries, the Commission will propose stronger enforcement of the rules in cases of non-compliance, Dombrovskis said, as past practice showed adhering to the rules was not a priority for some.

The Commission will also propose simplifying the rules by focusing on a single observable indicator, such as the expenditure benchmark, Dombrovskis said.

The expenditure benchmark is a rule that allows governments to increase spending each year by the rate of the economy's potential growth - the rate at which an economy grows without generating excess inflation.

This way, when the economy is growing faster than potential and overheating, the lower spending helps to cool it. When the economy is growing below potential, the higher government spending helps it catch up.