The clock is ticking, the debts are mounting, but the European Union still remains far apart from a deal on new budget rules.

When EU finance ministers gather in Luxembourg this week, there will be one headache at the top of their agenda: Reforming the EU’s fiscal rules.

The current rules, known as the Stability and Growth Pact, are scorned by many EU countries – some of which often fell afoul of the strict stipulations – because of the one-size-fits-all approach.

If ministers do not agree by the end of the year, the old rules will be back in force in 2024.

The EU first suspended the pact in March 2020 as COVID-19 ran rampant in Europe, forcing the bloc’s 27 member states to pour billions of euros into their economies to keep households and businesses afloat.

Then, just as Europe reached the light at the end of the tunnel, Russia invaded Ukraine last year, sending energy prices spiraling and forcing another suspension.

Supporters of greater fiscal discipline argue that tough rules are needed to control national budgets from ballooning, while critics say they curb member states from investing just as Europe needs to fend off challenges from China.

Today, the pact says a country’s debt must be 60% of its gross domestic product (GDP), while its deficit must be 3%.

The reforms published in April would keep these objectives but allow a more tailored, country-specific approach to debt reduction with greater flexibility.

Member states are, however, divided over whether the reforms should keep some blunt rules to lower debts and deficits every year.

The current rules suffer from many shortcomings, according to Bruegel think tank senior fellow Zsolt Darvas, who said the reforms would be a “major improvement.”

He pointed to “many different targets” and “sometimes conflicting rules within the current framework,” adding there is too much focus on budgets on a year-on-year basis.

“The main issue is whether, in the medium and long term, the public debt is sustainable,” Darvas told Agence France-Presse (AFP).

Debt Discipline

The European Commission’s reforms propose that member states work with the EU’s executive arm to formulate a debt-reduction plan for their country over four years.

The plan can even be extended to seven years in exchange for reforms and investments.

Every government accepts the need for reform, but some countries, including Germany, want to maintain certain targets to ensure discipline over debts and deficits.

The stickiest subjects include common safeguards on debt and deficit reduction that have pitted France against Germany.

In a concession to Germany, the reforms demand countries reduce their deficit by a minimum of 0.5% every year until they no longer exceed the 3% limit.

France, however, argues that automatic and uniform rules do not work and risk hurting Europe more than helping.

“The member states’ positions are so far apart, it is almost impossible to have a political agreement in October,” an EU diplomat said.

There have been talks about a budgetary exemption for green and digital investments to support the EU’s focus on clean energy. However, some member states oppose this since “that would be a massive chunk of budgets,” another EU diplomat said.

But with war raging in Ukraine, ministers will likely agree on a defense exemption as member states plough money into their militaries, the diplomat added.

Market risks

With their eye on the hourglass, real work began last week with intense talks to prepare the outline of a deal, but diplomats cautioned against expecting a final agreement on Tuesday.

Even if no accord was struck in October, “there could be a deal before the end of the year,” informed an EU diplomat.

Another diplomat said there could be a deal in November.

The fear is that if there is no agreement before 2024, the issue will lose its urgency and get put off as the EU prepares for elections in June.

“If we can’t get a deal, markets won’t like this. It will show the political impotence of the EU,” an EU diplomat added.