The dispute over the future fiscal rules in the European Union has turned into a political shadowboxing match with no visible progress. None of the parties involved are willing to come out of their defensive positions. However, the debt grace period expires at the end of the year: Starting in January 2024, the Stability and Growth Pact, which is in need of reforms, will be fully in effect again, four years after the EU Commission invoked the escape clause due to the pandemic.

The financial markets are expecting a signal of clarity on how the authority in Brussels and the 27 member states plan to address the partly chronically excessive levels of debt. Given this expectation, the outcome of the informal discussions among the finance ministers (Ecofin) in Santiago de Compostela is disappointing: The urgent reform of fiscal rules is not progressing.

This is largely due to a classic divide among EU members. Both sides are roughly equal in size: German Finance Minister Christian Lindner has the support of Austria, the Netherlands, and nearly a dozen other colleagues from Scandinavia, the Baltic States, and parts of Central Eastern Europe. In the opposite corner, Italy, Spain, and several others, mostly from Southern Europe, have rallied behind French Finance Minister Bruno Le Maire.

The central conflict line between the two camps revolves around how much flexibility is allowed for strategic investments and how much debt reduction is required. While the debate over the importance of sound state finances may not be as fiercely contested as in previous years, the fundamentally different perspectives on the nature of the Stability and Growth Pact make reaching an agreement so difficult.

Fortunately, the German and French governments agree on one thing: Italy's desired Golden Rule, which would exclude a specific type of state expenditures from deficit calculations across the board, cannot be a reliable solution. Otherwise, there are unfortunately no new insights as regards the substance to report, making the time pressure for negotiations all the more evident.

Lindner is sticking to his proposals from the spring and waiting for the other side to move towards him. The German formula particularly restricts the growth of state expenditures year by year. This would limit the EU Commission's ability to negotiate tailor-made debt reduction plans for each country over several years.

Le Maire wants to create more leeway for state investments by excluding some of these investments from the deficit calculation. Defense spending has taken center stage, but it also encompasses the aspects of green and digital economic transformation. Nonetheless, Le Maire seems to avoid an open substantive debate and relies too much on commonplace statements.

Spanish negotiator Nadia Calviño – who isn't entirely impartial – has set deadlines for her colleagues in Santiago de Compostela, which she hardly believes in herself. Achieving a political agreement on the central points by October requires a great deal of imagination. Even if negotiations with the EU Parliament can begin in November, reaching an agreement this year seems utopian.

In the field of the Capital Markets Union, Lindner and Le Maire have shown how progress can be made with a joint roadmap. Berlin and Paris also stand together behind the anti-dumping procedures against Chinese electric cars, even though the French objective does not sit well with the German auto industry. A political alliance is even more necessary for the Stability and Growth Pact. However, the Franco-German harmony ends where the reform of fiscal rules begins.