When does a country have too much debt? How many years in a row can government spending exceed income? At what pace should the debt be paid off?
These questions will be discussed this week in Brussels in several formations.
The finance ministers will meet to summarize fiscal policy on Monday. Member states have stepped up their lobbying efforts in recent days as the Commission prepares to unveil its long-awaited plan to reform the EU’s debt and deficit rules on Wednesday.
Positions have been negotiated behind the scenes since the corona year 2020, when the old financial discipline rules were put on the shelf. The new rules should start to be followed in 2024.
After the commission’s presentation, we can discuss the specifics. The member states and the EU Parliament still have to approve the new debt and deficit rules.
Undersecretary of the Ministry of Finance Leena Mörttinen according to the rules should be such that decision-makers and citizens also understand them.
– That [sääntökehikko] is not only made for economists, but specifically for decision-makers, and that citizens also understand it, says Mörttinen.
Mörttinen represents Finland in the EU Economic and Financial Committee, whose positions the commission has heard in its preparatory work.
Finland no longer belongs to the “middle caste”
Until now, the EU has paid attention above all to the debt of southern countries such as Italy, Greece or Portugal, but in the future Finland’s budget may also come under more detailed scrutiny.
After all, Finland is no longer one of the brightest stars in economic management. The debt ratio of the public sector is already clearly higher than the 60 percent in relation to gross domestic product defined as the upper limit in the EU Stability and Growth Pact. After that limit, the debt should start to be reduced.
In relation to the size of the economy, or GDP, Finland now has a debt of 72 percent, or about 24,500 euros per Finn. That amount will increase in the next few years, for example next year by around two thousand euros per head.
The Stability and Growth Pact defines how countries can get into debt and how big the budget deficit can be – that is, how much more spending can be than income.
Since the states have to break both the debt and deficit rules even more blatantly than before in the energy and economic crisis, the rules are going to be changed.
The Commission is reportedly planning to divide the EU countries into three groups in the future. The distribution would be so that the “good” ones below the 60 percent limit would be allowed to manage their finances without supervision.
The actions of debtor countries that are in the 60-90 percent bracket would be monitored, and those that go over 90 percent would be “high risk countries” under strict control. Finland would thus belong to the middle caste.
Is it likely that Finland will also face more specific reasons due to indebtedness in the future, Leena Mörttinen?
– We have to wait for the details of the framework, how it classifies countries and on what schedule the debt levels must be reduced. It is very interesting to see those details, we will only be able to comment when we see them.
Debt management is getting more expensive
The Stability and Growth Pact was originally intended to guarantee that euro countries do not live beyond their means and cause harm to other countries belonging to the common currency.
The agreement is the monetary union’s most important regulation. It was largely due to German pressure. Germany feared a monetary union that would water down the sluggish economic policies of other countries.
When the agreement was drawn up on either side of the turn of the millennium, the current crises were not foreseen. Now, for ten years now, the European Central Bank has been supporting the economies of states by making it easier for them to obtain debt.
When inflation has started to accelerate as a result of the Russian war of aggression, the ECB has had to raise interest rates. The repayment of both housing debtors and the government debts of euro countries is becoming more expensive.
And when the state spends more money on interest expenses than before, it takes away from citizens’ services. For next year, the Finnish government has budgeted 1.5 billion euros for interest payments.
Debt rules are relaxed
Commission officials have previously leaked information about Wednesday’s rule proposal, for example For Handelsblatt (you switch to another service), to Les Echos (you will switch to another service), For the Financial Times (you will switch to another service) and For Bloomberg. (you switch to another service)
It is known that the commission intends to maintain the old limits on budget deficit and debt, but deviations from them would be allowed more flexibly than before.
This is how the EU wants to ensure that, for example, climate investments receive funding in the future. If the purse strings were tightened too tight, the effort to get rid of fossil fuels would become more difficult.
According to media reports, the Commission intends to propose that each country draw up its own multi-year plan to reduce the debt burden. This would give member countries more time to reduce their debts.
The core of the reform is the removal of the so-called 1/20 rule. It is stipulated that the excessive debt must be reduced back to a tolerable level at an annual rate of five percent, which would take 20 years.
After the corona pandemic, this goal has started to be considered impossible to achieve for many countries.
In the future, the government of each country would agree on a multi-year debt plan with the EU, which would take into account the member country’s own starting points, such as economic growth or inflation, better than at present. Each country’s plans would be approved by the EU countries together.
If there was flexibility in the payment of the debt, the EU would, on the other hand, monitor the policy measures taken in the country more closely than at present. The commission would be tasked with closely monitoring even small deviations, because when they accumulate they can create a big problem.
The Commission would also have the right to fine member countries if necessary, but with amounts clearly lower than those in the current agreement. This would make the imposition of fines easier – now penalty fees have not been lowered for political reasons, because the amounts have been set so high.
“Small countries can make a difference”
According to Mörttinen, the influence of small member states in the rule reform has been strengthened by the fact that decisions must be made unanimously.
– Then even a small country has influence. In the negotiations, we don’t go to extreme positions – “this doesn’t work for us and this doesn’t work for us” – but we look for more of a common denominator. It’s been great to notice that there isn’t a single country in the EU that doesn’t consider debt sustainability to be very important, Mörttinen describes.
According to him, it is important for Finland to simplify the rules and “ownership” of the member countries.
– This way, the decision-makers who make a promise to their citizens are able to live up to their promise, and the citizens also have the freedom to choose new decision-makers if the promise is broken.
According to Mörttinen, for the EU’s credibility, an agreement on the new rules should be found as soon as possible.
– Thanks to the exceptional crisis period, we have bought time. The mere fact that we reach a settlement is a test for us, among others, in the eyes of those who are watching from the outside, i.e. market forces, for example.
Graphics corrected 7.11. at 10:18 a.m.: Changed state debt to public debt in the title of the image. Corrected Leena Mörttinen’s title as Undersecretary of State.
You can discuss the topic until Tuesday evening, November 8. until 11 p.m.
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