By Jan Strupczewski

BRUSSELS, (Reuters) – So often at the root of disputes between its members. The European Union begins reviewing its national budget rules on Tuesday in order to adapt to a post-pandemic reality. This includes higher public debt as well as the enormous costs associated with transitioning to a zero emission economy.

The landmark review, expected to last until 2022, will see governments, economists, and academics debate ways to simplify the Stability and Growth Pact. It has become so complicated that very few people understand it.

The original 1997 resolution consisted of two regulations. It was followed by 12 more pages. Since then, the number has multiplied many times. A 108-page manual is also available. This guideline is updated each year by European Commission.

Pact has the main objective of protecting the euro’s value by reducing government borrowing. The euro zone does not have a single monetary strategy, but each country in the group sets its own budget policy.

This is what has caused many conflicts over the years. Romano Prodi, then President of the European Commission in 2002, called the Pact “stupid”, an opinion he still stands behind today.

Prodi stated to Reuters that the Pact caused him a lot of difficulties at the time. But, people later said they were right as they understood why the Pact failed in times difficult. “I’m not sure I was wrong.”

In 2010, the dangers of running fiscal policies in one currency were exposed when Greece’s excessive borrowing, which was hidden from both the EU’s statistic office and the Commission that enforces them, caused the sovereign debt crisis, almost threatening the currency.

The Pact was changed once before — when France, Germany and Germany decided not to accept the rules being applied to them in 2005 and again in 2011, and 2013, to guarantee that the markets would be safe if they invested in the euro in 2013 and 2011.

100 IS THE NEW 60

The changes to be discussed now also reflect a crisis, this time caused in part by the COVID-19 Pandemic. This has seen national output rise to about 100% from 60%-70% during the 1990s.

For countries that have debts exceeding 160% or greater than 20% of their GDP, such as Italy and Greece, the annual reductions in debt required under current regulations are not feasible.

Klaus Regling (head of the Euro Zone Bailout Fund and ex-head of the Commission’s Economic Department) stated that a debt target of 60% was sensible when the Maastricht Treaty had been negotiated. However, it is not practical now.

Regling explained that the debt-carrying capability of governments was higher than assumed under the Maastricht Treaty. Therefore, these elements must be considered.

Many ministers of finance believe the requirements for debt reduction are too restrictive in post-pandemic times. But there’s no consensus on the best way to address them.

CLIMATE INVESTOR FINANCE

Other challenges include ensuring that government rules are not tied to governments in a situation where the EU of 27 nations needs hundreds of billions to end net CO2 emission by 2050.

An analysis by the Bruegel think-tank for EU finance ministers in September showed additional public investment to meet the EU’s climate goals will have to be 0.5%-1.0% of GDP annually during this decade alone. Bruegel suggested exempting investments to combat climate change from EU deficit calculations.

Although the idea is supported by France and Spain, it is also being supported by other countries. Officials however point out that it is difficult to define what constitutes a green investment. Valdis Dombrovskis Vice President, Commission has stated that an investment exemption plan will certainly be part of any future discussions.

However, some officials believe the Pact is flexible enough that any additional relaxation could lead to problems down the line.

“The call for easing or reform has always existed – and it has always been wrong. “It would be a mistake for us to relax the rules right now,” Theo Waigel (ex-German finance minister), said to Reuters. He is known as the father of euro due his involvement in setting up rules in 1990s Germany.

Some countries wanted investments to be excluded, while others were concerned about the potential pandemic consequences. However, other countries could subtract military expenditures from stability pact calculations. There has been always something governments wanted to avoid over the years. He said that it was right to resist.