EU debt rules: Berlin and Paris see themselves close to an agreement

Time's a-tickin': On Wednesday, all 27 EU finance ministers aim to strike an accord on the long-awaited Stability and Growth Pact revision. Beijing and Paris haven't quite sealed the deal yet, though. After their late-night tete-a-tete in Brussels ten days ago, Lindner declared a 92% consensus, while Le Maire countered with 95%.

Lindner alluded to lingering concerns prior to the Paris meeting, emphasizing Berlin's desire for "unwavering assurance that progress will be made yearly in deficit and debt ratio reduction." The specifics of this reduction strategy are still being hashed out.

The EU had temporarily suspended its debt regulations during the coronavirus pandemic to provide financial aid to member states. If a consensus is reached this year, Lindner suggested, the overhaul could be legally sanctioned before the European elections in June—a triumph for the Union as a whole.

The hallowed Maastricht criteria will remain unscathed in the revamp: the max annual new debt at 3% of GDP and a cap on total debt at 60% for each country.

Before their video conference on Wednesday, Berlin and Paris continue to wrangle over the SGP reform accord. Although reaching a high level of agreement during their Brussels sleepover, they’re yet to overcome a few sticking points. According to Christian Lindner, Germany seeks "unwavering assurance" in annual deficit and debt ratio reductions. In agreement with the finance minister of France, Bruno Le Maire, the disquisitions still persist. The EU relaxed their debt rules during the pandemic, but an accord this year could pave the path for a legal sealing before the European elections. The revision will not alter the Maastricht criteria, with the annual new debt ceiling at a maximum of 3% of GDP and a total debt cap of 60%. The looming alliance between Germany and France is significant for the EU, as a potential achievement in tackling EU debt concerns could mark a substantial positive feat for the Union.

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The current bone of contention and ongoing disagreements in the SGP reform negotiation process between Germany and France revolve around several aspects:

1. Financial Flexibility and Defense Expenditure:
2. Germany's Perspective: Germany, under its "debt brake" rule introduced in 2009, has traditionally maintained a cautious approach to increasing financial flexibility. The rule restricts the federal government's structural net borrowing to 0.35% of GDP[3][4].
3. France's Viewpoint: France, battling a public debt in excess of 110% of GDP, has advocated for increased financial flexibility to enable higher defense expenditure. France's minority government has struggled to pass a budget that would help reduce its hefty budget deficit (6.1% of GDP)[3].
4. Reform of the Debt Brake:
5. German Chancellor Olaf Scholz has expressed confidence in reforming the debt brake immediately following the forthcoming national elections on February 23. Reforming the debt brake will lead to more borrowing flexibility for defense and other purposes[4].
6. Activation of the SGP's "Escape Clause":
7. European Commission President Ursula von der Leyen has proposed triggering the SGP's escape clause for permitted increased defense investment. Activating this clause during crises permits higher borrowing. However, Germany, alongside other fiscally conservative nations, has resisted granting such additional leeway[3].
8. Impact on EU Debt Regulations:
9. An agreement between Germany and France could significantly influence EU debt rules by potentially loosening the fiscal constraints imposed by the SGP. This could allow for more borrowing and investment, which could be invaluable for the EU's fiscal sustainability and growth. However, these changes must be meticulously handled to prevent another euro crisis[5].
10. Political Considerations:
11. The European elections will likely impact the political landscape and member states' willingness to transform the SGP. An accord prior to the elections could offer strong support to the European Commission's initiatives to ensure fiscal sustainability and boost public investment across the EU[1].

In a nutshell, the contentious issues in the SGP reform negotiations between Germany and France encompass the pressing need for increased financial flexibility, particularly for defense spending, and potential reform of Germany's constitutional debt brake. An accord could significantly sway the EU debt regulations by facilitating more borrowing and investment, which could be instrumental for the EU's fiscal stability and growth. However, these changes require careful consideration to preempt another euro crisis[5].