Economy

Europe is being urged to spend, but some nations are showing little appetite for change

Key Points
  • There are countries that believe the debt and deficit ceilings should be changed to allow for further spending, but some say changing these limits is unthinkable.
  • Valdis Dombrovskis, European Commission vice president for the euro, said: "Today's discussion seemed to confirm to me that we must approach cautiously a possible revision of the legislation."
Portuguese Finance Minister and Eurogroup President Mario Centeno rings the bell at the start of a meeting of Eurogroup Finance Ministers.
FRANCOIS WALSCHAERTS | AFP | Getty Images

EU nations are at odds on how to change rules on government spending in the 28-member bloc — an impasse that could potentially halt plans to revive the region's economy.

The European Commission, the EU's executive branch, has started looking at ways to change its complex fiscal rulebook; but the initial debate between finance ministers at the weekend showed it will take time before any concrete proposals emerge.

"I do believe that the simpler the rules are the better and the enforcement factor is essential, because if we do not obey the law, then the credibility of the whole system is very weak," Lithuanian Finance Minister Vilius Sapoka told CNBC before meeting his EU counterparts. 

Currently, the EU fiscal rules state that European countries should not have budget deficits higher than 3% of their annual gross domestic product (GDP) or a public debt figure above 60% of their GDP. There are countries that believe these ceilings should be changed to allow for further spending, but some say changing these limits is unthinkable.

"There's not much appetite for big discussions," a European official aware of the talks among the finance ministers, who did not want to be named due to the sensitivity of the talks, told CNBC Monday morning.

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Certain countries believe fiscal rules should be based on verified formulas. For example, at the moment, the European Commission assesses member states' output gap — the difference between the actual output of an economy and its maximum potential output. However, there are different views on how to calculate it, making the application of the rules more difficult.

Political Fatigue

Speaking at the end of a finance ministers meeting in Helsinki, Finland over the weekend, Valdis Dombrovskis, European Commission vice president for the euro, said: "Today's discussion seemed to confirm to me that we must approach cautiously a possible revision of the legislation."

He added: "We will also have to assess whether we can realistically achieve agreement on simpler rules without opening the legislation."

European Central Bank President Mario Draghi has urged European governments to look at their fiscal policy plans and match the efforts of his central bank. Given the economic slowdown in the euro zone, Draghi suggested that countries with fiscal space should invest more, and those nations with a large debt pile should be careful with their spending.

Guntram Wolff, director of the think tank Bruegel, told CNBC via email that "the appetite to change the rules is rather limited."

"Yes, there is some recognition that the rules don't work well but yes, there is also a big political fatigue to really renegotiate this difficult topic," he said.

France and Germany, for instance, believe there are other issues more pressing to fix, the EU official added.

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Ricardo Garcia, a euro zone economist at UBS, said this issue could be irreconcilable for the EU.

The divergence of opinion among the various countries is "what happens in an incomplete fiscal union," he said via email, adding that the delay in taking action "makes the euro zone less resilient and hence less attractive," in the short-term.

"The current setup implies quite some asymmetric risks in the event of shocks, with countries with low credit ratings suffering from a low shock absorption capacity. In cases like Italy, we would even expect a fiscal tightening in the event of a severe recession," he said.