Brussels is willing to bend the fiscal rules for Italy and Greece one more time. It is also telling everyone that this has to be the last time for a while.
At the finance ministers' meetings in Luxembourg this week, the Commission looked favourably on requests from Rome and Athens to stretch the national escape clause, a mechanism first built for defence spending, to cover energy costs. In the same breath, Economy Commissioner Valdis Dombrovskis said the EU cannot keep loosening its framework while markets are watching.
Greece asked to exempt energy-resilience investments from the net expenditure growth limit. The Commission backed an extension worth up to 0.3% of GDP a year and 0.6% cumulatively by 2028, which covers about €1 billion of new investment funded from national resources.
Italy wants more room too. Rome wants inflation factored into how its compliance is judged, so it can use windfall-tax revenue to fund short-term energy relief. The Commission's assessment is positive, but the final word sits with the Council. If member states agree, Italy would be able to borrow more for defence and energy.
"We cannot come with new fiscal flexibilities all the time," Dombrovskis told reporters. He argued it would undermine confidence in governments' commitment to sustainable public finances. The framework, he added, already takes inflation into account, and price pressures may last into winter.
His message to capitals was to aim support at the most vulnerable. Blanket measures push up fiscal costs and feed inflation. EU governments spent about €18 billion this year shielding households and businesses from higher prices, according to the Commission, equal to roughly 0.1% of EU GDP.
Other capitals agree. Dutch finance minister Eelco Heinen was blunt: "Piling debt on top of debt makes our problems bigger. We need to spend less and reform."
The timing is awkward. Euro-area inflation came in at 3.8% in September, higher than expected, driven by energy prices after the war against Iran. Ten-year government bond yields in several euro-area countries have reached multi-decade highs. US 10-year Treasuries yield around 5.3%, the most in almost 25 years, while France pays about 4.9% and Italy about 4.7%.
The moves this week were violent. French 10-year yields swung as much as 16 basis points lower and 18 basis points higher on successive days before settling. French bonds were set for their first weekly gain in six weeks and Italian bonds for their first in nine, as Brent crude slipped toward $100 a barrel. That is relief, not a recovery.
Kyriakos Pierrakakis, Greece's finance minister and president of the Eurogroup, acknowledged the shift. "Investors are becoming more sensitive to fiscal risks," he said, adding that neither more borrowing nor indiscriminate cuts is the answer. On France's widening spreads, he said ministers were "vigilant, but not alarmed". Princeton economist Markus Brunnermeier described the global debt picture as unsustainable in the long term.
Flexibility has become a currency, and the Commission is worried about printing too much of it. Italy and Greece will probably get what they asked for, because the Commission has already said yes. But every exception makes the next request harder to refuse and the rules harder to take seriously, and investors are pricing that in. The next test is the 2027 budgets. Countries with high debt that arrive with weak plans will find that markets, not Brussels, set the limits.
