Despite the expectations and efforts of the Spanish presidency since July, there will be no agreement on the reform of fiscal rules and European economic governance this month. Last Monday, the Spanish Government distributed among the 27 its first concrete proposal to seek consensus, a paper to find what in community jargon they define as “landing zone”, something that can satisfy capitals that have positions completely opposite. But all the sources consulted, in almost a dozen delegations, point in the same direction: convergences are beginning to be perceived, there is lukewarm progress and sufficient maturity for the issue to reach the ministers’ table. But it will take much more time. Hopefully, in November, but everything is beginning to point to December, where not only the members of Ecofin will see the issue, but probably the heads of State and Government at the last summit of the year, whose agenda is beginning to become overloaded.
It is not only the question of the Stability Pact, of debt reduction or of how to enhance the essential investments to maintain growth. The governments of the 27 have not yet decided who will be the next president of the European Investment Bank (EIB), which leaves the future of the acting first vice president, Nadia Calviño, in the air. During the summer, Spain hoped that in Santiago de Compostela, a few weeks ago, a specific proposal on community governance would have been debated at the highest level, and that the race for the position of the Luxembourg-based Bank would have been closed. But neither of them came close. And now, neither.
The sources consulted say that there is no rush, that the outgoing president, Werner Hoyer, has a mandate until January. The large countries (which in this case are the ones who will decide, since there is no vote by capital, but rather it is weighted by their weight in the capital of the EIB) have not spoken openly. Italy because it still has a candidate, to whom no one gives any chance, but who allows them to have a good hand in other negotiations. France seems to be leaning towards Nadia Calviño, since Emmanuel Macron has had his ups and downs in recent years with his great rival, the Danish Margrethe Vestager, but he has not yet spoken out. And the same goes for Germany. Chancellor Olaf Scholz supports the Spanish woman, but his Finance Minister, and key partner in the coalition government, prefers his Danish liberal colleague. From Berlin everything indicates that the balance is tipping in Calviño’s side, but the moment is delicate. IF the thing had been resolved in Santiago, nothing would happen, but now Germany, which is the country that is being toughest on the issue of fiscal rules, has a good chance to pressure, or to sell its vote at a high price.
The issue has been entrenched since day one. The previous rules, patched again and again since Maastricht (1993) did not work and everyone knows it. The proposal launched by the European Commission seeks to give it more pragmatism: more flexibility, more ad hoc adjustments for each Government and more national responsibility in the adjustment mechanisms so that it is not a robotic imposition from outside (replicating the model used in the Next Generation Funds ), through four-year national adjustment plans (extendable to seven for delicate cases) in exchange for much more effective, rapid and applicable pressure or even sanction measures.
The problem is that Germany, and with it up to 13 countries, say no. There is a kind of split down the middle in the Union, although not all with the same degree of vehemence or rigidity. Berlin wants, contrary to the initial philosophical spirit, that there be annual adjustments for countries that have imbalances, that there be minimum forced reductions in debt or deficit. Warning, from the Executive or the Bundesbank, that an agreement that is too soft would generate distrust among investors and would not reverse the unrest that exists now, indirectly pointing to Italy and how the debt markets have punished their risk premium for the unilateral announcement that The year’s deficit will be larger than expected.
There are different formulas on the table, from an annual reduction to being during the four-year cycle, or up to 17 years for the most indebted countries according to the initial Spanish proposal, but the Netherlands and the so-called hawks or frugals demand that the debt reduction at the end of a clear path are there, with first and last name, with figures for everyone.
On the other side, Spain, France or Italy, which say that this has not worked and will not work. They ask for more flexibility, more time for countercyclical adjustments. Or they ask that investments in strategic issues for the entire EU (such as green transition or digitalization but perhaps also in Defense seeing the state of the world) do not count towards debt or deficit.
There are four axes that are being debated at the same time, and this Monday and Tuesday the ministers will address it for the first time in Luxembourg, trying to set guidelines for the technicians. The first are the safeguards required by the most orthodox countries, and specifically clear and annual number objectives for debt or deficit reduction of up to 0.5% annually.
The second is the so-called “institutional balance.” What role and weight does each actor have? The toughest ones do not want everything to remain in the hands of the European Commission, which they consider historically too soft and are looking for another pair of external eyes. “We trust the European Commission, but this is like when they diagnose you with something very serious: you trust the doctor, but just in case you ask for a second opinion,” summarizes a diplomatic source. Which could be the European Fiscal Board, for example, which they want to give a leading role.
The third divisive issue is application or execution. One thing is what the countries say they are going to do, the objectives they set, and another is what happens in reality. The pressure, fiscal coercion or sanction mechanisms must be outlined when, within an excessive deficit procedure, the required adjustments are not made annually, every four or seven academic years.
The last question is that of investments. Those from the south want them to be left out of the calculations. They appeal to the Golden Rule, when debt is dedicated only to investment and not to even an increase in current spending, but they are still not convincing. Everyone agrees that investments are fundamental, but there was only a certain consensus on those related to Defense, which in the Spanish proposal would benefit from a special status. They would count, but it would also be a mitigating factor in the event of deficits above 3% of the Stability Pact, which will remain unchanged.
The text presented on Monday by Spain is very open, alive. Some adjustments have already been made, based on the comments received, and it is not clear whether it will go with that to Luxembourg or a new one will be presented, if there is a possibility of landing at at least one of the points. But it is very difficult because they are all linked to each other, they cannot be negotiated in isolation. If you push on one side they will have to pull on the other. The ministers have taken advantage of the IMF’s Marrakesh meeting for many meetings (also for the presidency of the EIB, whose organization falls to the Belgian minister), but at a technical level the issue remains at a standstill. Next appointment: in November and if a miracle were to occur, and Ecofin managed to reach an agreement, negotiations would begin with the European Parliament in the so-called trilogues, something that seems almost impossible during the Spanish presidency.
