Centeno calls for rethink of EU debt and deficit rules

The outgoing president of the eurogroup has said Brussels should avoid “blindly” reapplying the EU’s debt and deficit limit rules after the Covid-19 crisis, warning that it could tip the bloc into a fresh recession. 

Mário Centeno, who departs as head of the eurozone finance ministers this week, told the Financial Times that governments should use the pandemic and the pause on the normal application of EU budgetary limits that has followed to rethink the rule book, including the ceiling of 60 per cent of gross domestic product on national debt levels. 

“What is important on the fiscal front for Europe in the coming months and years is the way we engineer the process of return to the application of the fiscal rules in a way that avoids prompting a recession,” Mr Centeno said. 

Eurozone public debt is expected to expand to 102 per cent of GDP this year as governments have pumped money into their businesses and labour markets during months of economic hibernation.

“This crisis will result in large increases of public and private debt. It will require a strong investment push,” said Mr Centeno, who was nominated in June by Portugal’s government as the next governor of the country’s central bank.

“This is true for all countries. Applying the rules blindly could prove unrealistic under such circumstances, hurting the credibility of the framework.”

Brussels took the unprecedented move to suspend the application of its “stability and growth pact” at the onset of the crisis, a move designed to avoid punishing countries for their stimulus efforts. 

But the slow return to normality has revived calls for a fundamental rethink of the rules which have been a source of constant tension between Brussels and eurozone capitals in recent years.

Mário Centeno: ‘There is no point in seeking to establish unrealistic trajectories to reinstate the stability and growth pact.’ © Olivier Hoslet/EPA-EFE

Fiscally hawkish governments have complained that the commission has shown too much discretion in applying the rules, pointing out that no country has ever received a sanction for breaking the debt or deficit limits since the launch of the single currency in 1999. Economists also point to their sheer complexity, which at one point required a 200-page guide book on how to interpret them correctly.

Mr Centeno said that the European Commission, which launched a consultation on the Stability and Growth Pact last year, should continue its work and plan to present ideas for reform to ministers to discuss after the summer. 

Niels Thygesen, head of the European Fiscal Board (EFB) which was set up to scrutinise the application of EU budget rules, last week said that the 60 per cent target was “unrealistic” and should be ditched in the wake of the crisis. The EFB has also called for continuation of the “general escape clause” suspending the rules, warning that reapplying the stability and growth pact next year would force countries into a harsh fiscal contraction. 

Northern eurozone capitals are likely to resist the push to keep the framework suspended indefinitely. They want a swift reimposition of the debt and deficit limits once the immediate crisis phase is over. 

Mr Centeno said that while current negotiations over a €750bn EU recovery package were the “immediate priority”, finance ministers should try to set “realistic targets” for the restoration of the fiscal rules.

“We should not rush, but we know that we need to walk the road back to normal in fiscal policy,” he said. “There is no point in seeking to establish unrealistic trajectories to reinstate the stability and growth pact, given the huge uncertainty regarding the evolution of the virus and its impact on our economies. We first need to get out of the woods.”