From: lessgovt@gmail.com   
      
   EU Strikes Deal to Curb Public Debt   
   By Tom Fairless and Laurence Norman, Dec. 20, 2023, WSJ   
      
   EU governments have agreed on new rules to curb budget deficits and debt,   
   drawing a line under years of freewheeling spending during the Covid-19   
   pandemic and the Ukraine war.   
      
   The agreement reached on Wednesday comes as rich nations face both rising   
   borrowing costs due to higher interest rates and increased spending needs on   
   items ranging from defense to the green transition and an aging population.   
      
   The deal, which comes after months of negotiations and still needs formal   
   backing from governments and EU lawmakers, opens up a divergence between   
   Europe and the larger U.S. economy, which is expected to run large budget   
   deficits for years and has been    
   growing faster.   
      
   The new rules are generally more lenient. They give countries more time to   
   reduce budget deficits to the target 3% of gross domestic product, incentivize   
   certain kinds of investments from a country’s budget gap, and encourage   
   countries to reduce their    
   public debt more gradually. They also give more space for governments to   
   loosen fiscal policy temporarily during downturns.    
      
   The new rules will replace the fiscal framework that used to govern public   
   spending and borrowing in the EU until it was suspended at the start of the   
   pandemic. They aim to put budget deficits across the 27-nation bloc on a   
   downward path, while leaving    
   room for green investment. The deal walks a path between Northern European   
   countries like Germany that are eager to keep debt in check and southern   
   European nations such as Italy that would prefer more room for state   
   investment.   
      
   At a news conference, Spanish economy minister Nadia Calviño said the deal   
   sought to balance the need to rein in higher debt and deficits with ensuring   
   investment in green and digital technologies and defense. The new rules “are   
   more credible and will    
   also be easier to apply,” Calviño said.   
      
   The effort to curb debt will likely reassure investors in European bond   
   markets that public finances in the region are sustainable. But it could also   
   weigh on economic growth at a time when Europe’s economy has been stagnant   
   for a year. Officials    
   expect the European Parliament to approve the rules early next year before   
   they become binding in 2025.   
      
   “This agreement provides for fiscal rules that encourage reforms, with room   
   for investments and tailored to the specific situation of the member state in   
   question,” Dutch Finance Minister Sigrid Kaag said after the agreement was   
   reached. They work    
   counter-cyclically so that potential economic growth is not cut short.”   
      
   Across advanced economies, governments are still borrowing heavily four years   
   after the start of the Covid-19 pandemic. However, a jump in long-term   
   interest rates, as central banks battle high inflation, have made raising debt   
   expensive, suggesting that    
   countries might in future need to run smaller deficits than in the past.   
      
   Now, rich countries face massive new bills to finance the costly shift to   
   green energy infrastructure and support aging populations. Together, those   
   costs might add 3 percentage points of gross domestic product to annual   
   government spending over the    
   coming years, according to Capital Economics.   
      
   With rising spending needs but less room to borrow, many governments will find   
   themselves considering tax increases. In Germany, the government this month   
   announced a series of energy tax increases and spending cuts to plug a hole in   
   next year’s budget,   
    which had opened after the country’s top court ruled it couldn’t tap   
   unused pandemic funds.   
      
   To safeguard investments required to address climate change and social   
   problems and bolster Europe’s defense spending at a time of rising interest   
   rates, the new rules allow for a transition period until 2027. For the next   
   couple of years, governments    
   tasked with reducing their deficits to 3% of GDP will be able to maintain   
   higher investment spending levels by discounting the additional borrowing   
   costs they face.   
      
   Europe conducted large scale fiscal stimulus to support workers and businesses   
   during the pandemic and after the start of the Ukraine war. The measures   
   included sweeping energy subsidies and supporting the wages of tens of   
   millions of furloughed workers.    
   EU governments were less lavish than the U.S., however, which ran double-digit   
   budget deficits for two years—one reason for Europe’s slower economic   
   recovery.    
      
   Government debt in the U.S. is expected to increase to 127% of GDP next year,   
   about 40 percentage points higher than the ratio of 88% in the eurozone,   
   according to IMF data.   
      
   The broad outlines of the European Union’s budget rules were laid down in   
   1993 as part of the Maastricht Treaty that paved the way for the euro. They   
   stipulate that budget deficits should not exceed 3% of GDP and overall   
   government debt should not    
   exceed 60% of GDP. Those rules were suspended in 2020 to allow governments to   
   respond to the pandemic, and again during the Ukraine war, to allow   
   governments to support households during the surge in energy prices.    
      
   The U.S. is likely to run budget deficits of more than 7% of GDP over the next   
   3 years, while the combined deficits of eurozone governments will decline to   
   2.7% of GDP next year, according to the International Monetary Fund. Within   
   the eurozone, deficits    
   vary widely. In Greece, it is forecast to fall to 1.6% of GDP from 2.3% last   
   year, while Ireland is forecast to have a budget surplus for the second   
   straight year. Italy and France continue to have deficits of roughly 5% of GDP.   
      
   Governments that test the limits of their budgets, like the U.K., have been   
   punished by investors. U.K. borrowing costs skyrocketed last year when then-PM   
   Liz Truss announced a surprise package of large tax cuts. Truss was quickly   
   replaced by Rishi Sunak,   
    whose government has instead raised taxes in an effort to bring its debts   
   down.   
      
   One of the toughest discussions over the new EU rules was how to replace a   
   widely-disliked provision which demanded that countries with debt over 60% of   
   their economic output had to reduce them by a set amount each year.   
      
      
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