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EU fiscal-deficit restrictions leak, and debt rises

A battle between “frugal” and more relaxed fiscal policies will shape Europe’s economy over the coming years, says a Bloomberg article. Interest rates at zero and the Covid-19 crisis are among the forces that could push the “Growth and Stability Pact” from the 1990’s aside.

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A November meeting between French president Emmanuel Macron and Italian prime minister Mario Draghi manifested their shared ambition to move away from the restrictions of the EU pact – rules that were put in place around the launch of the euro. For the nations of the EU, it limits public debt to 60 percent of GDP (gross domestic product), and yearly public deficits to 3 percent of GDP.

The Bloomberg article can be found here.

Record-low interest rates and the Covid-19 crisis have shifted the cost-benefit calculation on taking on more debt. But also, after the struggles for Greece to boost growth under heavy austerity measures, the consensus on policy among economists has shifted to allow for more expansive activities.

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Can the exception be reversed?

Even so – and despite the fact that all major economies, including conservative Germany, have long surpassed the 60-percent limit – several nations and economists still swear by the strict rules. Currently, an exception applies due to the Covid-19 situation, so the question is whether the original limits can be re-installed as the exception runs out in 2023 or else which new rules should apply. The pact is regulated in treaty, so a change will require all 27 EU nations to agree.

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