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EU to edge towards deal on new fiscal rules; big differences remain

FILE PHOTO: European Union flags fly outside the EU Commission headquarters in Brussels

By Jan Strupczewski

BRUSSELS (Reuters) - European Union finance ministers will edge closer on Thursday to a deal on new fiscal rules for the 27-nation bloc, senior officials said, but agreement is still a long way off as large differences over the pace of debt cuts remain.

The talks are part of a revision of the EU's fiscal rules that underpin the euro and that financial markets are watching closely. The rules have been suspended since 2020 but are to be reinstated from 2024, and EU governments want to update them by the end of this year before they kick in again.

The rules limit budget deficits to 3% of gross domestic product and public debt to 60% of GDP. If either is above the limit, there are disciplinary steps for those who do not cut the excess fast enough.

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Many European governments far exceed the deficit and debt limits now and at the same time need to invest to fight climate change. This focuses the discussions on a delicate balance between debt reduction and investment and reforms.

Adding to the complexity, the ministers also are haggling over the balance of power between them and the European Commission and how to effectively enforce the rules that are agreed in the end. All the elements are linked and trade-offs made using all of them.

The pace of debt reduction is still the biggest hurdle, with Germany wanting all EU countries to be obliged to cut public debt by at least 1% of GDP a year.

The European Commission and France believe any debt cuts at all over four years would be fine. The four years could even be extended to seven years if a government invests in what the EU considers priority areas like fighting climate change.

Paris would also be ready to accept a numerical target for debt cuts demanded by Berlin if it were averaged over the four to seven years, to allow for year-to-year fluctuations.

Spain, which holds the rotating presidency of the EU and is therefore in charge of finding a compromise, wanted to prepare a draft legal text of the rules for Thursday, but divisions were too big and Madrid only proposed a narrowing of differences called a "landing zone" in EU jargon.

"As far as the (debt reduction) benchmarks are concerned, there are no numbers in the landing zone, but concrete numbers (for example, the German and Danish proposals) are being discussed," one senior euro zone official involved in the talks said.

"There has been some progress, but we still have a long way to go," the official added.

Officials are also split on a Spanish proposal for more time for debt reduction to be granted if a country simply delivers on the reforms listed in its post-COVID recovery plan - focused on making the economy more green and digital - that is the basis of receiving money from the EU Recovery Fund.

Many governments believe that simply delivering on the recovery reforms, already financed by the EU, is far too little to be granted an extra three years for debt reduction, officials said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)