France and Germany align on EU fiscal rules review

France and Germany have reached substantial agreement on proposed changes to European Union fiscal rules, marking a significant step forward in their collaborative efforts. However, one critical point of contention remains, particularly regarding the treatment of investment spending when a country’s deficit exceeds EU limits. French Finance Minister Bruno Le Maire addressed reporters ahead of a crucial meeting of EU finance ministers, emphasising the significance of preserving the capacity for investment, which he deemed a “red line” for Paris.

Le Maire expressed optimism about the overall progress, stating, “I consider that France has taken every necessary step towards Germany to reach a compromise, we are 90% in agreement.” The sticking point centres on the approach during excessive deficit procedures, a term used under EU rules. When a country surpasses the deficit ceiling of 3% of GDP, it is required to reduce the deficit by 0.5% of GDP in structural terms annually until it falls below 3% again.

France is advocating for a more flexible approach, proposing a smaller annual deficit reduction if a government commits to reforms and investments within a negotiated four-year medium-term plan with the European Commission. Le Maire highlighted the importance of maintaining incentives for investment and structural reforms during the excessive deficit procedure, suggesting a flexibility of 0.2 points per year.

“This principle is an absolute red line,” Le Maire emphasised, underlining the critical nature of preserving flexibility for encouraging investments and reforms during the designated four-year period. The ongoing discussions between France and Germany are a crucial element of the broader review of EU fiscal rules, which were suspended in 2020 due to the COVID-19 pandemic and the energy crisis.

Finance ministers from EU member states are working to adapt the fiscal framework to the post-pandemic reality, considering the challenges of high public debt and the need for significant public investment to address climate change. The proposed changes aim to provide EU countries with more time to reduce debt through tailored plans and create incentives for public investment, even when governments face the necessity to cut spending. While France has accepted certain proposals from Germany, including setting a minimum annual average debt reduction and establishing a safety buffer below the deficit ceiling, the negotiations underscore the complexities of finding consensus on these critical fiscal issues. The final outcome will likely shape the fiscal landscape in the EU and impact how member states navigate economic challenges in the coming years.