IMF Urges EU Fiscal Revamp To Ward Off Threat To Bloc’s Future

(Bloomberg) -- The International Monetary Fund urged the European Union to revamp its fiscal framework amid high debt and rising interest rates, saying the reforms are critical to avoid debt crises that “could put the EU itself at risk.”

“Amid extraordinary economic uncertainty and fiscal challenges ahead, reform of the EU fiscal framework cannot wait,” fiscal affairs department Director Vitor Gaspar, together with European section counterpart Alfred Kammer and strategy chief Ceyla Pazarbasioglu, wrote in a blog published Monday. 

Among the IMF’s three key recommendations is the creation of a so-called EU Fiscal Capacity -- to be funded through common debt issuance -- that could help eurozone members better manage economic downturns and provide public goods.

That idea is similar to the EU’s 800-billion-euro ($797 billion) pandemic recovery fund set up in 2020 with a landmark commitment to borrow the money as a bloc rather than individually as member countries. The IMF’s version would include a climate investment fund to help countries reduce carbon emissions and end their dependence on  Russian gas.

The IMF proposed the new fund as part of a broader overhaul of the Stability and Growth Pact, the main framework for EU fiscal policy, which the bloc’s finance ministers are due discuss this week.

It requires the 27 member states to aim for budget deficits below 3% of gross domestic product and national debts of below 60%, targets that would remain in place under the IMF proposal. 

Few members currently meet those criteria, after the twin shocks of the pandemic and the war in Ukraine. The EU suspended the rules in 2020 and has extended the waiver until the end of next year.  

That means there’s “a window of opportunity” to undertake reforms, one that “should not be wasted,” the IMF department directors wrote. 

The European Commission, the bloc’s executive arm, is due to put forward its own ideas for a fiscal overhaul in the coming weeks. Member governments are split over how ambitious it should be, with some favoring measures to meet investment needs while others focus on fiscal stability.  

Other elements of the IMF proposal include: 

• Member states would develop their own medium-term budget plans which would be assessed by a new, independent European Fiscal Council. EU countries would also set multi-year annual spending caps.
• Member states with fragile finances would need to post a balanced budget or a surplus over three to five years, while those with less debt would have more flexibility -- encouraging governments to build buffers in good economic times.

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