Clashes Over EU Spending Rules: European Commission Proposes More Flexibility to Reduce Debt and Deficit
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Clashes Over EU Spending Rules: European Commission Proposes More Flexibility to Reduce Debt and Deficit

EU debt rules should be reformed to give member countries more fiscal space to modernize their economies. While some believe that this will encourage investment and trigger growth, others, with Germany at the forefront, fear that loose fiscal policy will only increase the deficits and debts of highly indebted member states.

Recent crises have led even thrifty countries like Germany or the Netherlands to take on large amounts of public debt, leading to calls for reforms. The bloc’s strict debt and deficit rules, known as the Stability and Growth Pact, have been temporarily suspended due to the Covid-19 pandemic, and that suspension has been extended due to skyrocketing energy prices, a consequence of Russia’s war against Ukraine.

The previous rules will be applied again from 2024. However, the European Commission has proposed to give highly indebted European countries more flexibility in reducing debts and deficits.

“At the same time, we ensure equal treatment and consideration of country-specific situations,” European Economic Commissioner Paolo Gentiloni said at a press conference at the end of April.

According to current EU spending rules, public deficits of member states cannot exceed three percent of their gross domestic product, and debt must remain below 60 percent of GDP. According to these rules, states must return five percent of annual GDP that exceeds the 60 percent limit. For highly indebted countries, this is disastrous for growth. The rules date back to the 1990s and were often ignored even before the pandemic. They should also have been reformed before then.

The current reform proposal retains the previous goal of limiting debt, but there will be more flexibility through debt reduction plans for individual countries.

Attitudes about debt rules and new proposals are very different in individual EU countries.

“Frugal” northern countries, including Germany, want the rules to remain strict, while southern states such as Italy say they are limiting their ability to invest.

Debts of EU member states have grown over the past 15 years. The EU aims to conclude the agreement by the end of this year.

Berlin calls for binding targets

Germany, a staunch defender of fiscal discipline, fears the reform will loosen EU budget constraints too much and undermine fairness within the bloc.

German Finance Minister Christian Lindner commented on the changes.

“Germany cannot accept proposals that weaken the Stability and Growth Pact,” he said, adding that “significant adjustments” are needed.

Lindner’s remarks sounded like a “recipe from the past,” a European Commission official said.

Referring to the reform of EU fiscal rules, Commission Vice President Valdis Dombrovskis asserted that “we live in a completely different world than 30 years ago. Different challenges, different priorities.” The new rules would have to reflect those changes, he added.

France and Germany disagree

The commission also appears to have tried to appease Germany with a proposal that says member countries must reduce their deficit by 0.5 percent a year if it exceeds three percent of GDP.

However, France was not happy with the change. The country’s debt is about 110 percent of GDP.

“Certain points are against the spirit of the reform… We are against uniform automatic rules for reducing the deficit and debt,” French Finance Minister Bruno Le Maire said at the end of April. The compromises proposed by the Commission still provide for a “general escape clause” in the event of a severe economic crisis.

Most welcome a country-specific approach

Belgian Finance Minister Vincent Van Petegem said he very much welcomed the proposal, especially the country-specific approach set out in the rules. He said that debt reduction while focusing on investments and reforms is essential. The current Belgian government wants to get back in order and reduce the deficit to 2.9 percent by 2026. Its goal is to reduce the deficit by 0.8 percent annually between 2024 and 2026.

Dutch Finance Minister Sigrid Kag said her country was “quite enthusiastic” about the plans, but stressed the importance of “credible debt reduction” and oversight. “The devil is always in the details,” she said.

Spanish Finance Minister Nadia Calvino, who will oversee negotiations in the second half of the year, said she would do “everything possible” to approve new fiscal rules this year.

Spain will take over the EU presidency in the second half of 2023, and in the meantime, Brussels and Madrid disagree on Spain’s deficit forecast. The Spanish government has calculated that it will reduce its deficit to three percent in 2024, as required by EU fiscal rules that will be applied again next year. The Commission, however, estimated that Spain’s public deficit will rise to 3.3 percent in 2024.

From Rome, Economy Minister Giancarlo Giorgetti welcomed the Commission’s legislative reform proposal as a “step forward” that would allow us not to return to the old pact.

Giorgetti, however, did not hide his disappointment over the failure of the so-called “golden rule”, which would have allowed strategic investments to be taken off the account.

“We strongly demanded that investment expenditures, including those typical of the Digital and Green Deal NRP (National Recovery Plan), be excluded from the calculation of target expenditures against which compliance with the parameters is measured. We note that this is not the case,” he said.

Based on some technical simulations circulated in Brussels, the adjustment of Italian accounts could lead to a reduction of the structural deficit by 0.85 percent per year in the case of the four-year plan and by an average of 0.45 percent in the seven-year plan. At the same time, Italy is the only country that has not ratified the European Stability Mechanism (ESM) and aims to link the ratification with the outcome of the Stability and Growth Pact negotiations.

“If you start connecting everything to everything, it becomes more difficult to progress,” warned Commissioner Valdis Dombrovskis.

Romanian Finance Minister Adrian Cacio claims that the package should strike a balance between “sustainability (healthy public finances) and inclusive and sustainable economic growth (need for reforms and investments)”. He added that the new framework should create sufficient conditions to encourage investment in member countries with economic difficulties or uncertain fiscal space.

Today, Italy’s debt amounts to 144.4 percent of GDP, while Belgium is expected to have a debt burden of 106 percent by the end of this year – well above the bloc’s borders.

Slovenia and Croatia: A stricter methodology for smaller countries?

Slovenia, on the other hand, fears that it will be difficult to reach a common methodology for measuring the debt level, due to the large differences between the member states.

“When it comes down to it, the basic proposal of the commission is not particularly to our liking,” Finance Minister Klemen Boštjancic said in Brussels on May 16. However, the country welcomed the proposal’s approach to focus on tracking debt trends rather than structural deficits, mainly because the latter were very difficult to calculate and results could also vary widely depending on the methodology, the minister said.

Slovenia’s main concern is that, in terms of methodology, the commission could be stricter towards small member states.

Croatian Finance Minister Marko Primorac said that his country is satisfied with the current rules and supports the new proposal aimed at strengthening the sustainability of public debt and giving greater autonomy to member states in conducting fiscal policy, but he believes that the proposed sustainability analysis model is unacceptable because it would put Croatia among high-risk countries.

“We consider the current system absolutely acceptable. We do not violate the existing rules, but we fully support any improvement to increase the transparency and simplicity of applying the methodology,” said Primorac on Tuesday in Brussels after the meeting of EU finance ministers.

According to Primorac, debt sustainability analysis is “a very complex model based on a series of assumptions that, when incorporated into the model, categorize Croatia as a high-risk country in terms of the level of public debt. Given our fiscal situation, this classification does not apply to us “. He pointed out that there is no reason for Croatia to be classified as a high-risk country when it comes to the sustainability of public debt, given the country’s very good fiscal results.

Bulgaria is working towards joining the Eurozone

Bulgaria still hopes to join the eurozone by 2025 and stay below the three percent deficit threshold. Bulgarian debt amounted to 22.9 percent of GDP in 2022, according to preliminary data published by the National Statistical Institute at the end of April. Nikolai Vasilev, a former deputy prime minister, said that measures will have to be taken on the expenditure side of the draft budget to achieve a smaller deficit. The fiscal reserve as of March 31 amounted to over 6 billion euros.


The European Central Bank (ECB) and the International Monetary Fund (IMF) welcomed EU proposals to overhaul their fiscal rules to boost growth, but the IMF called for more action.

ECB President Christine Lagarde said on April 26 that the bank appreciates “the commission’s efforts to reach a compromise with member states because that is already not certain given the balancing act you see in the documents.” Lagarde also pointed to “differences and disagreements between countries because they face different challenges”.

Source: Tanjug