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EU Commission sets up clash over reform of bloc’s debt rules

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The European Commission outlined legislative proposals to revise the bloc’s spending rules, setting up a showdown between Germany and more indebted southern nations as they try to thrash out a new agreement this year, Bloomberg reports. 

German Finance Minister Christian Lindner immediately criticized the plan from the European Union’s executive arm, which ignored his call for stricter debt-reduction benchmarks for member states.

“Significant adjustments are still needed to turn the proposals into reliable, transparent and binding rules,” he told reporters in Berlin, adding that they don’t yet meet his government’s requirements. “We must ensure that Europe has a stable economy and overcomes high deficits.”

The Commission said the changes to the Stability and Growth Pact aimed to encourage national governments to carry out economic reforms, while giving them leeway to invest in priority areas such as green energy, digital infrastructure and defense.

Member states would publish plans with clear targets over at least four years, and debt as a portion of gross domestic product would have to be lower by the end of the period, according to the commission. Bloomberg reported the details late on Tuesday.

The changes outlined on Wednesday would also lead to more stringent enforcement of the fiscal rules.

The proposals “aim to bring about a more gradual but steadier reduction in debt levels, and to boost sustainable and inclusive growth through investment and reforms,” EU Economy Commissioner Paolo Gentiloni told a news conference in Brussels.

A spokesperson for the Dutch government welcomed the announcement and said it was important for the European Parliament to come to an agreement before the end of the year, adding that highly indebted nations must put their public finances in order to deal with future crises.

Parts of the proposals will need unanimous approval among member states, although this isn’t the case for the most significant changes, including the focus on the medium-term and granting more leeway to member states to design their fiscal plans.

Still, negotiations are likely to be difficult in the coming months, with the parliament also required to give its consent to important elements of the new rules.

Southern capitals are expected to resist the plan for a minimum fiscal adjustment of 0.5% of GDP per year as a benchmark when deficits are above 3% even in cases where a sanction procedure hasn’t been launched, according to officials.

Italy’s economy minister, Giancarlo Giorgetti, said the commission hadn’t taken into account his country’s request for investment expenses to be excluded when assessing whether spending complies with the rules.

For French Finance Minister Bruno Le Maire, certain aspects of the plan go against the spirit of the reform and need to be reworked, such as having automatic, uniform rules on reducing deficits and debt.

The region’s finance ministers will have a chance to discuss the issue at an informal meeting outside Stockholm later this week, which will also be attended by central-bank governors from the bloc.