Brussels is planning to simplify the eurozone’s complex budgetary rules to provide governments with softer debt reduction targets that do not push struggling economies into trouble during downturns.

In what is set to be one of the most politically sensitive debates for the next European Commission, officials are considering ways to rewrite the bloc’s Stability and Growth Pact, which has come under fire for being impossible to enforce and overly flexible for governments that are in breach of the rules.

The plan, known informally as “SGP 2.1”, is designed to help restore trust among eurozone capitals in the EU executive’s enforcement of the rules. In the past year, Brussels has been heavily criticised for letting Italy’s anti-establishment government avoid punishment for failing to meet its deficit targets in 2018 and 2019.

An internal brainstorming document from EU officials, seen by the Financial Times, calls for a “substantial simplification” of the rules. It notes that SGP, whose interpretation requires a 108-page guidebook to decipher, has led to “imprudent fiscal positions” and “procyclical fiscal policies” that impose overly restrictive limits on struggling governments. 

The debate comes as eurozone economies are experiencing slowing growth and Germany, the bloc’s powerhouse economy, faces the threat of recession this year. Supporters of reforming the SGP argue that global trade tensions, the threat of a no-deal Brexit and constrained monetary policy mean it is time for the EU to have clear rules that will help rather than hinder the role of fiscal policy.

However, one senior eurozone official made the contrary argument, with Italy facing both the prospect of new elections in the autumn and a deadline to submit its 2020 draft budget. “With the outlook uncertain, it will make everything harder,” this person said.

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Officials are eyeing a proposal to revamp the rules within the first 12 months of the new commission coming into office in November. One of the main reforms under consideration is a rethink of debt targets to allow for “reasonable and sustainable debt reduction for the most vulnerable economies”.

Currently, economies with excessive deficits have to reduce their debt burdens by 1/20th a year over three years to move towards a 60 per cent debt-to-GDP target. Officials have privately admitted the target is impossible for most governments to meet when their economies are slowing with little inflation. 

Ursula von der Leyen, the incoming president of the commission, told MEPs last month that Brussels would “make use of all the flexibility allowed in the rules” to promote growth and investment.

Referring to splits between northern and southern eurozone governments, the document notes that the commission will have to tread carefully given “the high level of polarisation and mistrust between advocates of a strict automatic application of the rules and a more judgment-based approach”. 

Hawks led by the Netherlands want the new commission to provide no “political” discretion when applying the rule book. Others such as Italy’s Eurosceptic Matteo Salvini have lambasted the SGP as undermining national sovereignty and punishing weak economies.

No eurozone economy has ever been hit with financial penalties for breaking limits that impose a 60 per cent of GDP ceiling on debt and budget deficits no higher than 3 per cent of GDP. 

Valdis Dombrovskis, vice-president in charge of the euro, said he opposed moves to substantially relax the SGP: “There are calls that already now there is too much flexibility. It’s a very difficult political debate where views are very different.”

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Luis Garicano, an economist and liberal Spanish MEP, said the current rules put “the commission in an impossible position”.

“Citizens in debtor countries feel constrained by an unaccountable process and citizens in creditor countries feel debtors are being let off the hook. We need a system that is simpler . . . and more accountable,” he said.

Twitter: @mehreenkhn

Via Financial Times