Ukraine: Push for looser EU fiscal rules gains momentum

Bloomberg

The war in Ukraine is starting to change the tone of negotiations to redesign Europe’s fiscal rules, injecting new impetus into calls for more flexibility on borrowing and budgets as the continent’s economy braces for the consequences of Russia’s invasion.
Concerns that the fighting will hinder the pandemic recovery have made it more likely the European Union will agree on less-stringent fiscal rules, according to people familiar with the talks who asked not be named discussing private meetings.
The current uncertainty will probably increase backing to exempt some investments from the regulations — including defense and an EU self-sufficiency drive known as strategic autonomy, an official from the bloc said.
The shift would mark a stark turnaround, with many member-states until recently pushing to reimpose discipline following the relaxation permitted when Covid-19 struck. Even with public-borrowing levels now near record-highs, EU officials are opening the door to suspending limits on debt and deficits for a fourth year due to events in Ukraine.
“In the current context of war, it’s not reasonable to return to previous fiscal rules that would force a disproportionate fiscal adjustment that risks the recovery and social cohesion of our continent,” Spanish Prime Minister Pedro Sanchez told lawmakers as he expanded tax breaks to cushion the economic blow from the invasion.
His remarks follow last year’s alliance between Italian Prime Minister Mario Draghi and French President Emmanuel Macron to convince Europe’s fiscally conservative north to embrace new rules to spur investment and growth, despite concerns about spendthrift tendencies in the south.
In a sign northern nations aren’t averse to big spending, Germany abruptly reversed years of opposition to higher defense expenditure at the weekend, approving massive outlays to bolster its military and meet Nato investment goals.
“Any discussion of reforms of the fiscal rules should really only start once the postwar contours are clear,” said Carsten Brzeski, chief economist at ING.
That sentiment is shared by German Finance Minister Christian Lindner, who said Tuesday that “as soon as we have more certainty we can decide on consequences — also for the EU’s future finance planning and the fiscal rules in the currency union.”
Germany’s position “remains that we want quantitative guidelines sensibly applied for budget developments in the EU,” he said.

Fiscal Lever
Even if rules are waived for another year, the gradual wind-down of European Central Bank asset purchases and rising bond yields will complicate borrowing for governments, according to analysts at Citi.
A suspension wouldn’t mean that “governments, especially those of highly-indebted countries, will be able to use the fiscal lever as freely and amply as it has been the case during the pandemic,” the said in a report to clients. The EU’s Stability and Growth Pact requires member-states aim for budget shortfalls of less than 3% of gross domestic product and debt of less than 60%. There’s already a broad consensus to slow the pace at which debt loads should be reduced to avoid wrecking the recovery.