EU Fiscal Deal: France and Germany Disagree on Investment Spending

Copyright Markus Schreiber/Copyright 2023 The AP.

   In a lengthy session in Brussels, EU finance ministers found themselves short of a finalized agreement on a fresh fiscal framework.

After an extensive eight-hour discussion, European Union finance ministers made progress towards new EU fiscal rules in the early hours of Friday. However, it appears they'll require more time and potentially another meeting to secure a deal, according to two officials close to the discussions, as reported by Reuters.

The proposed reform aims to establish a sustainable approach to control member states' debt and deficit, all while allowing space for investments in green initiatives and defence.

Key disagreements persist, particularly between France and Germany, regarding how to sustain investment when a country's budget deficit exceeds EU limits. Other nations, roughly divided into two camps aligning with Paris and Berlin, are grappling with issues such as the minimum pace of annual debt reduction.

"I understand there was good progress, but they need further consultations from a political and legal point of view," one EU diplomat told Reuters.

France remains resolute in achieving a deal on the new EU fiscal rules by year-end, with Finance Minister Bruno Le Maire stating that the agreement's rate has now reached 95%.

"If there is a new Ecofin before Dec. 25, France will happily participate to reach a final deal on the new rules of the stability and growth pact," affirmed Le Maire.

How the COVID-19 pandemic and climate crisis left the rules outdated

A revamp of the rules that support the euro currency, setting government debt limits at 60% of GDP and deficits at 3%, is deemed necessary due to a spike in public debt post the COVID-19 pandemic, rendering the existing framework impractical.

EU governments are grappling with the need for rules that accommodate substantial public investment to combat climate change, an aspect overlooked by the outdated system.

The ongoing reform aims to alleviate current fiscal consolidation requirements by providing each country with personalized debt reduction paths spanning four to seven years, coupled with incentives for investment.

Countries are addressing various issues, including determining the size of fiscal safety buffers to prevent breaching EU borrowing limits and enhancing rule enforcement.

Officials close to the talks suggest the possibility of another meeting in December. "The Spanish presidency of the EU will reflect on Friday on how to move forward and on the idea of organizing a potential additional meeting of EU finance ministers," stated the diplomat.

Time is of the essence as the new rules require approval from the current European Parliament, set to dissolve in April before the June European elections.

While a December deal among governments may not impact the eurozone's fiscal stance for the upcoming year, as decisions have already been made in draft national 2024 budgets under earlier EU guidelines, it holds significance for bond investors and the credibility of EU fiscal coordination. The European Central Bank relies on fiscal policy to combat inflation.