Eurozone: Christine Lagarde outlines ECB plans for first rate hike

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

Olaf Scholz’s government published a paper on Friday outlining its proposals to amend the EU’s Stability and Growth Pact governing how much debt member states can take on and how they must pay it back. In January, German finance minister Christian Lindner, insisted Germany wants to keep spending under control.

He said: “It is crucial that we continue to pay attention to the importance of the fiscal rules.

“Fiscal rules are crucial to maintaining the credibility of governments vis-à-vis the capital markets.”

But his then French counterpart, Bruno Le Maire, insisted the bloc should focus on growth now that it comes out on the other side of the pandemic.

He said: “It must be a growth pact first. Growth comes before stability.”

The European Union’s Stability and Growth Pact is meant to stop governments from borrowing too much in order to safeguard the value of the euro common currency.

But the rules have often been disregarded, leading in part to the 2010 sovereign debt crisis, with little attempt made to enforce them by applying financial penalties.

After the COVID-19 pandemic, some eurozone countries are also saddled with large public debt that cannot be reduced in line with current requirements without plunging their economies into recession, so a new debt reduction rule is needed.

France, Italy and Spain are calling for a relaxation of the rules.

With this new paper, Berlin has for the first time make some important concessions, though it is still demanding stricter enforcement of the rules. 

In a blow to the EU Commission, Germany is also calling for member states to have more direct control on fiscal reforms. 

The paper read: “Flexibility must go hand-in-hand with clearly defined limits and with improved mechanisms for enforcing the rules.”

The German government now also accept the current rules impose “unrealistic adjustment paths” to re-pay debt.

During the 2010 eurozone debt crisis, Germany was seen in Spain as a leading member of the northern European “frugals” that imposed financial restrictions and looked down on “spendthrift” southern neighbours.

The latest data shows that the average debt to GDP ratio in the euro zone is at close to 100 percent, from Greece with a ratio of 207 percent, to Estonia with 19 percent.

DON’T MISS:
Ukraine LIVE: Nuclear horror as Putin pummels Europe’s LARGEST plant [LIVE BLOG]
China-Taiwan LIVE: ‘Cat and mouse’ Horror as Xi pushes warships ahead [ANALYSIS]
Nigel Farage speaks at US rally in Texas to get rid of Nancy Pelosi [VIDEO]

Last year, EU Commissioner Paolo Gentiloni warned differences between northern and southern states are a risk worth taking in order to reach an agreement, as he backed Spain, France and Italy on their proposals.

He said: “The risk of differences is there — you could even argue the risk is stronger if you don’t open the debate on the rules.”

Last year, former Austrian Finance Minister Gernot Bluemel said the rules had been central to reducing debt-to-GDP ratios across the bloc after the sovereign debt crisis.

Mr Bluemel wrote in the letter: “A key lesson after the financial crisis was the need to reduce high debt ratios and increase fiscal sustainability in order to prepare for unforeseen future events.

“The Commission will come up with a review of the economic governance framework in the coming months.”

He added some ideas for reforms of the EU’s Stability and Growth Pact presented by southern states were “concerning”.

He said: “I am somewhat concerned about some contributions questioning a rules-based framework or diluting the value of sustainability.

“Our common objective must be a reduction of debt to GDP ratios over the medium- and long term.”

Source: Read Full Article