Europe scrambles to finalise new fiscal rules after lawmaker vote

EU lawmakers and governments will engage in a furious few weeks of haggling over fiscal rules, after MEPs today (17 January) voted for budget deficit curbs that diverge from a deal struck by governments in December.

Finance ministers meeting in the EU’s Council already spent months arguing over a new economic governance framework, and now they’re going to have to do it all over again with MEPs.

Electoral cycles and financial market pressure mean they’re in a race against time.

The tough fiscal rules that constrain national tax and spending within the EU have long been controversial, after debt-laden Greece sought a bailout over a decade ago.

The fiscal framework was more or less abandoned entirely during the pandemic, and now policymakers are attempting to determine what comes next, with June elections looming.

Esther de Lange, the Dutch Christian democrat who marshalled the parliament’s views, told her fellow lawmakers the new rules would “protect the credibility of the Union and the stability of the eurozone.”

The MEPs’ proposal allowed flexibility for investment in priority areas like the environment, she said – adding that “stability means respecting our planet … not burdening the next generations with unsustainable levels of debt.”

Compared to the December deal, de Lange’s text doesn’t set exactly the same numerical targets for debt reduction, and MEPs also want tougher independent fiscal watchdogs.

Lawmakers get an equal say over plans on budgetary planning, and they need to compromise quickly.

The agreement “needs to be reached by the first half of February, if we want to have this legislative process concluded in this political cycle,” the European Commission’s Paolo Gentiloni told reporters today.

“There is a lot of commitment from the parliament and from the council to reach this goal,” Gentiloni said, but added that there are “differences in substantial aspects” between the two arms of the legislator.

‘Suicide’

Critics fear a return to austerity economics that will curb the bloc’s ability to secure a green transition and victory in Ukraine.

“Voting for these rules is to choose for the EU a slow economic, environmental, geopolitical and democratic suicide,” the Green party’s Philippe Lamberts told lawmakers. “It’s to clip our wings at the time when we should be taking flight.”

He failed to convince MEPs, who then voted 431 to 172 in favour of de Lange’s position.

Talks intended to hammer out a final position between the council, parliament and commission started almost immediately after the vote, a sign of the time pressure officials feel under.

But Lamberts has vowed to try and frustrate any deal, and it’s still an open question if and how talks will conclude.

Deal in sight

According to Sander Tordoir of the Centre for European Reform, the hawkish German government is unlikely to relinquish the numerical targets so painfully hammered out in December – but might be willing to concede on some subdsidiary issues.

Tordoir, a senior economist at the think tank, is optimistic a deal will be found, as there’s no unbridgeable philosophical gulf between the parliament and council.

If not, he warns of serious consequences – including the return of old rules that are both “absolutely terrible,” and no longer credible given the extra debts racked up during Covid-19.

“If the deal collapses, you’re in an absolute limbo,” Tordoir said, adding the absence of legal clarity may also start to make bond markets twitchy. “I don’t think that’s really a feasible outcome.”