The EU moves to scrap the ‘unrealistic’ debt rule as it moves away from austerity once and for all

The EU wants to scrap an “unrealistic” budget rule that forces heavily indebted countries to cut spending even in times of crisis.

It’s the latest blow to austerity policies instituted after the 2008 financial crash and effectively ended by the Covid pandemic, when the bloc lifted its deficit limits and unveiled a trillion-euro investment plan.

While the EU’s 25-year-old debt and deficit limits remain in place, countries will be allowed to deleverage more and more slowly as they try to shore up slowing growth.

The European Commission on Wednesday proposed ending a rule that obliges heavily indebted countries to reduce some of that debt by 5 percent each year and eliminate all over-indebtedness within two decades.

“Ultimately, debt sustainability depends on Member States reducing high public debt ratios in a realistic, gradual and sustainable manner,” said Economy Commissioner Paolo Gentiloni.

“Therefore, we believe that we should move away from the unrealistic demands made by the […] Debt reduction rule.”

However, he said he would not blame the bloc’s debt and deficit rules for ‘slash and burn’ austerity policies being enacted in Ireland, Greece, Portugal and Spain after the last crisis.

EU rules, enshrined in the bloc’s treaty, require governments to keep budget deficits below 3 percent of gross domestic product (GDP) and debt below 60 percent.

The commission suspended the rules during the pandemic, but they are expected to come back into force from 2024.

If governments and lawmakers agree, today’s rule change would extend the fiscal timetable from three to four years and give governments an extra three years to reduce debt if they commit to reforms and pro-growth investments.

Countries with “severe or moderate debt problems” must continue to “prudently” cut net spending and “credibly” cut deficits below 3 percent of GDP.

Eurozone governments could be fined for failing to meet their commitments, while any country could face an EU funding freeze.

The rule change does not include an offer backed by France and Italy for special treatment for green investments.

Ireland is classified as a medium-debt country by EU standards, with debt at 55 percent of GDP in 2021.

But that figure climbs to just over 100 percent when measured against the government’s preferred measure of modified gross national income (GNI*), which excludes some volatile multinational transactions like patents and aircraft leasing.

Gross debt is expected to fall to 225.3 billion euros by the end of this year, down from 236 billion euros last year by the Treasury Department, while the budget is expected to run a small surplus on buoyant corporate and personal income taxes. The EU moves to scrap the ‘unrealistic’ debt rule as it moves away from austerity once and for all

Fry Electronics Team

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