EU debt limit of 60pc no longer makes sense - ESM's Regling

BRUSSELS: The European Union's public debt ceiling of 60% of gross domestic product no longer makes sense and should be revised as the EU reforms its fiscal rules, the head of the euro zone's bailout fund Klaus Regling said on Wednesday.

EU law obliges governments to keep budget deficits below 3% of GDP and public debt below 60% of GDP to safeguard the stability of the common euro currency, now used by 19 members of the 27-nation bloc.

But since the two values were set in a protocol to the Maastricht Treaty in 1992, global economic realities have changed, prompting the EU to consider a revision of the rules that set the borrowing limits and enforce fiscal discipline.

The COVID-19 pandemic made the need for change all the more pressing, Regling, who runs the euro zone's powerful European Stability Mechanism, told a seminar of the Belgian central bank.

"In my view the 3% deficit limit remains relevant, and that's good because it's also mentioned in the Treaty. But we need to think about the debt limit. Or I should say a debt target of 60%, which made sense when the Maastricht Treaty was negotiated, but it doesn't make sense now," he said.

The European Commission is to present its ideas for revising the EU's fiscal rules, called the Stability and Growth Pact, towards the end of the year, focusing on the treatment of debt and investment and changes to what metrics are most relevant.

HIGH DEBT, LOW RATES

The final decision on how to change the rules will be in the hands of EU governments, most likely after talks in 2022 when the current rules will remain suspended to allow leeway in fighting the effects of the pandemic.

Regling said the average debt in the euro zone was now around 100% of GDP and sticking to the old rules that countries should reduce their debt ratio every year by 1/20th of what is above 60%, was not economically reasonable.

Another reason was that interest rates were much lower than in the 1990s and were unlikely to return to such levels in the foreseeable future.

"...therefore the debt-carrying capacity of governments is higher today than what was assumed in the Maastricht Treaty," Regling said.

But he cautioned that economic growth rates were also lower now and governments faced rising pension, health and others costs due to an ageing society and climate change.