EU capitals caught between markets and metrics as debt fears rise
Danger zone
The European Commission is wary of further tweaking its fiscal framework as bond markets test governments’ credibility and borrowing costs reach multiyear highs, writes Paola Tamma.
Context: High energy prices are squeezing governments preparing 2027 budgets, prompting Italy and Greece, the Eurozone’s two most indebted economies, to request more flexibility under EU fiscal rules to spend without risking sanctions.
But the Commission warned against further diluting the rules amid jittery markets.
“We cannot come with new fiscal flexibilities all the time,” said EU economy commissioner Valdis Dombrovskis yesterday, warning this would undermine confidence in governments’ commitment to fiscal sustainability.
The framework already allows for inflation when assessing compliance with spending limits, he added.
Rome and Athens also faced pushback from other EU capitals.
“Piling debt on top of debt makes our problems bigger. We need to spend less and reform,” said Eelco Heinen, Dutch finance minister.
Energy price increases resulting from the US-Israeli war against Iran have driven Eurozone inflation to a higher-than-expected 3.8 per cent in September.
EU governments spent €18bn cushioning households and businesses from higher prices this year, equivalent to 0.1 per cent of EU GDP, according to the Commission.
Higher inflation expectations, interest rates and concerns over mounting public debts have pushed 10-year government bond yields to multi-decade highs in several Eurozone countries, particularly France.
“Investors are becoming more sensitive to fiscal risks,” said Kyriakos Pierrakakis, Greek finance minister and Eurogroup president, warning that neither more borrowing nor indiscriminate spending cuts were the answer.
“We must achieve more with the resources that we already have.”