The Fight Over EU Fiscal Reform

LONDON – Last November, the European Commission proposed a radical reform of the European Union’s Stability and Growth Pact. The debate that followed – and the updated proposal that the Commission released in April – revealed that, despite the progress the EU has made in designing common policies over the last few years, mistrust still prevails.

As originally formulated, the Commission’s proposed legislation would replace rigid limits on public debt and fiscal deficits with country-specific debt-reduction targets (determined by a debt-sustainability analysis) and national medium-term fiscal plans. Monitoring would be based on a simple “expenditure path” – binding annual net-expenditure limits, excluding interest payments and adjusted for business-cycle variations – and enforcement would be strengthened.

Neither Germany nor Italy was convinced. Germany feared that the new system would give the Commission too much discretion over debt-reduction targets, making them susceptible to political pressures. Italy worried that the debt-sustainability analyses would generate volatility in the sovereign-debt market, and preferred to stick to a system that had been so rigid in principle that it ended up being flexible in reality.