New EU debt rules can only work with political support, the IMF says

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(Bloomberg) — New European Union fiscal rules will only work if countries with high debts and large budget deficits make a real material and political effort to get their public finances in order, the International Monetary Fund said.

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“The new EU economic governance framework will require significant fiscal adjustments in many Member States, as well as sustained political support to be implemented as envisaged,” the IMF said in a report published on Thursday.

France, Italy and five other countries were reprimanded by the EU on Wednesday for large budget deficits – the first stage in a process that will test countries’ willingness to meet requests and the bloc’s determination to enforce its new system set.

EU fiscal rules were reactivated at the beginning of this year, after being suspended since 2020, to facilitate the extraordinary national expenditure needed to weather the Covid-19 pandemic and the energy crisis. Countries may face censure by officials for running deficits that exceed the 3% bloc limit, subjecting them to the so-called Excessive Deficit Procedure, which requires corrective action and can lead to fines for non-compliance.

“The medium-term structural budget plans, due in September 2024, should be underpinned by a clear fiscal strategy, structural reforms that enhance growth and resilience, and high-quality measures,” the IMF said.

The European Commission’s rebuke comes as France faces parliamentary elections and the prospect of a winner from both far-right and far-left parties, raising market concerns that less effort will be made to rein in public finances.

Meanwhile, Italian Prime Minister Giorgia Meloni has made expensive promises to voters, including tax cuts on wages totaling about 10 billion euros ($10.7 billion), that could complicate plans to bring public finances under control.

Both countries have high deficits and debts that well exceed 100% of economic output. Other countries facing a reprimand are Belgium, Hungary, Malta, Poland and Slovakia. Romania was already confronted with a BTP.

“It is very important to guarantee the credibility of the new fiscal framework,” Finnish Finance Minister Riikka Purra told journalists on Thursday before a meeting of her EU counterparts in Luxembourg.

The IMF also encouraged the EU to continue its path of financial market integration to avoid falling behind global peers and falling short of its ambitions in energy security, climate change mitigation and the digital transition.

“Integrating fragmented national capital markets into a Capital Markets Union would help advance these objectives by boosting financing for innovative long-term investment projects, increasing risk-sharing opportunities, improving the allocation of savings in the EU and leveraging EU-wide economies of the economy . scale in the financial markets,” the report said. Promoting the banking union and ratifying the EU’s ESM backstop treaty should also be “priorities”.

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