To strengthen budgetary discipline, the European Council agreed to place more emphasis on "levels and evolutions of debt and overall sustainability," read the conclusions of the EU summit, which took place in Brussels yesterday.
A legislative proposal is expected to be tabled by the European Commission on 30 June.
Under the plans, a country will be considered to be in breach of the Stability and Growth Pact if its debt does not show a downward trend.
In other words, countries with debts above the Pact's ceiling of 60% of GDP will not be automatically rebuked by the European Commission, provided that the trends shows a positive evolution.
Twelve EU countries above limit
The new concept of "dynamic debt" was seen as necessary as EU leaders gathered in Brussels to push for stricter and more effective sanctions against debt-laden member states.
But keeping the current debt definition would have led to punitive sanctions for a majority of member states which are above the 60% limit.
Under the current definition, twelve EU countries would be found breaching the Stability and Growth Pact, according to Eurostat, the European Commission's statistical agency.
The average level of debt is predicted to reach 88.5% of overall eurozone GDP in 2011 and 83.8% for the EU as a whole, according to the latest economic forecasts by the European Commission.
Eurostat figures published in April reveal that the highest debt-to-GDP ratios were recorded in Italy (115.8%), Greece (115.1%), Belgium (96.7%), Hungary (78.3%), France (77.6%), Portugal (76.8%) and Germany (73.2%). Malta (69.1%), the United Kingdom (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%) came next.
Making the debt criteria 'operational'
"We need to make the treaty's debt criteria operational," European Commission President José Manuel Barroso told EU leaders at the summit, according to a spokesperson.
"In the future an infringement procedure for excessive debt can be avoided if a country shows a downward trend in its debt levels, even if its debt is above the 60% ceiling," he explained.
The details of the new legal framework are set to be unveiled by the EU executive on 30 June, when a fresh legislative proposal will be presented.
This will include sanctions for member states that do not respect debt criteria, as well as new debt indicators, a mechanism to increase coordination of national economic policies (the so-called 'European semester') and other measures to shape up Europe's economic governance.
Measuring debt
The most controversial issue is how to measure debt, with EU member states are at odds over whether the current method of calculation should be maintained.
For example, some countries would prefer to measure "aggregate" debt, which would include private alongside public debt.
Such a measurement would in fact be closer to the way markets look at a country's financial stability. Indeed, Spain - whose public debt is slightly above the 60% ceiling - is currently in the sights of speculators and rating agencies, which harbour doubts over the long-term sustainability of its public finances.
On the contrary, Italy, whose public debt is the second largest in Europe and among the biggest in the world (115.8% of GDP in 2010), has so far been spared by speculators due to the fundamental stability of its financial sector.
Britain soon under the spotlight?
If the principle of aggregate debt were to be adopted, the ranking of EU debt levels would be drastically altered.
The UK could become one of the most debt-laden countries in Europe due to its massive levels of private debt, while Italy would be transformed into a virtuous country thanks to the breadth of national private savings and the relative stability of its banking sector.
Unexpected backing for the idea came from the permanent president of the European Council, Herman Van Rompuy.
Referring to the principle of "overall sustainability," which is included in the conclusions of the summit, he made clear that "the concept covers a lot of parameters, including private debt," he said at a press conference at the end of the summit.
These extra parameters are likely to feature in the Commission's upcoming legislative proposal, although it remains to be seen whether they will be taken into account to start an infringement procedure for excessive debt, or whether they will simply remain competitiveness indicators that are not linked to concrete action.
Another way to exit debt crisis
Meanwhile, the European socialists suggested another approach to the European debt crisis. Rather than focusing on new parameters, their leaders gathered in Brussels before the EU summit called for "a European debt agency".
The agency would be aimed at "handling existing debt, facilitating future debt management and protecting against speculative attacks," according to a press release issued by the party.
A European debt agency "could provide relief to national budgets and be combined with clear political conditionalities to ensure sound economic and sustainable growth," adds the note.
