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EU commissioner wants less 'rigid' debt rules

May 1, 2021

The coronavirus pandemic has forced many EU states to take on huge new debts. Budget commissioner Johannes Hahn says the bloc's one-size-fits-all rule for total public debt is no longer appropriate.

An image of the EU flag surrounded by euro notes
Italy and Spain were hardest hit in 2020 by the coronavirus pandemicImage: Zoonar/picture alliance

European Union Budget Commissioner Johannes Hahn on Saturday called for more flexible limits for highly indebted EU states forced to take on new debt due to the COVID-19 pandemic.

His comments come days after the European Central Bank chief Christine Lagarde said theeurozone economy was "on crutches."

In remarks published by German newspaper Die Welt, Hahn called for the bloc's Stability and Growth Pact to be reformed, hinting that the rules are no longer workable.

What is the EU's Stability and Growth Pact?

The Stability and Growth Pact was signed in 1997 to strengthen the budget rules established in the 1992 Maastricht Treaty.

EU states must ensure their total debt doesn't exceed 60% of gross domestic product (GDP) in any year. States are only supposed to run budget deficits worth a maximum of 3% of GDP.

But the pact has proven to be unenforceable against larger EU countries such as France and Germany, who have run "excessive" deficits for many years, although Germany has remained within the limit from 2018.

France's current debt to GDP ratio is 119%, while Germany's is 54%.

EU Budget Commissioner Johannes Hahn
EU Budget Commissioner Johannes HahnImage: DW/M. Luy

What are Hahn's proposals?

Hahn wants those EU states hit hardest by the pandemic to recover their economies without severe sanctions from lenders under the current rules.

For example, Greece, with a debt of 205% of GDP, or Italy, with 155%, are unlikely to reach the current 60% target in the medium term.

"The fiscal policy goals for these countries must be realistic," the commissioner said. Rather than one rigid rule, each EU state should have an individual and achievable target to reduce its debt.

Hahn said weaker eurozone countries require large investments by governments before higher economic growth will spur tax revenues that help to reduce the debt burden.

But he insisted that under the reforms, countries would still need to make "structural adjustments" to public spending.

Hahn added that consultations on reforming the pact were likely to begin in the autumn.

EU recovery funds applied for

On Friday, Brussels said only nine of the 27 EU countries had submitted their national plans to unlock recovery grants and loans, worth billions of euros.

France, Greece, Portugal, Slovakia, Germany, Denmark, Spain, Latvia and Luxembourg were expected to be joined by other states in the coming weeks, the European Commission said.

The EU established a €750 billion ($907 billion) recovery package last year to stimulate the bloc's economies hit by the pandemic.

Countries have to submit plans on what they intend to use the money for, subject to certain conditions.

EU states must spend at least 37% of their allocated funds to support environmental purposes, and 20% on digitalization.

Under a complicated formula, Italy and Spain are set to receive the most money from the EU program because their economies suffered the most in 2020.

mm/rc (dpa, Reuters)