High debt EU countries should cut debt ratio by 1%/GDP a year minimum -Germany

By Jan Strupczewski

BRUSSELS (Reuters) – Planned new European Union public debt rules should require governments of highly indebted countries to cut debt every year by at least 1% of GDP, a German paper prepared for discussions on the rules to be held in the coming months proposes.

The paper, seen by Reuters, also said countries with medium debt challenges should be asked to cut their debt-to-GDP ratios by 0.5% of GDP as a minimum.

While the EU has yet to define which countries it would classify as “high debt”, Greece and Italy – with public debt to GDP ratios of 178% of GDP and 147% of GDP respectively – are obvious candidates.

The German paper is part of a discussion among the EU’s 27 countries, and especially the 20 that share the euro, on how to adapt EU debt rules that underpin the common currency to new realities of high post-pandemic public debt and the need for high investment to prevent climate change.

It aims to build on proposals by the European Commission to allow each country to negotiate their individual debt reduction paths with the EU executive, rather than impose a one-size-fits-all rule on everybody.

The existing rules require every country to cut debt annually by 1/20th of the excess above the EU ceiling of 60% of GDP, but that is now seen as unrealistic after governments borrowed heavily to pay for COVID-19 relief measures.

Berlin and several other EU countries are worried that the proposal for individually negotiated debt reduction paths would give the Commission too much political discretion.

“(The rule) should fix a binding lower limit for a necessary decline in the debt ratio of an appreciable magnitude in each year,” the German paper said.

“As a floor, it could for example be foreseen that the debt-to-GDP ratio must decline by at least 1 percentage point per year for member states with high debt challenge/debt ratios and by at least 0.5 percentage points per year for MS with medium debt challenge/debt ratios above 60%.”

The paper also called for the use of the expenditure benchmark as a way to steer public spending, keeping increases in net primary expenditure below increases in potential growth rate of the economy.

The bigger a country’s debt, the bigger the gap between increases in spending and potential growth would have to be, leading to a overall decline in the government deficit and therefore also debt, the paper said.

To prevent governments from back-loading any painful spending cuts or pushing them until after elections, Berlin called for deficit reduction paths to be no longer than a regular electoral cycle.

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