On Wednesday 26 April, the European Commission presented its legislative package for reforming the European economic governance framework, which seeks to strike a balance between the importance of putting public debt on a sustainable path when it has reached an average of 84% of GDP in the EU at the end of 2022 (up 20% in 20 years due to crises such as the Covid-19 pandemic) and, on the other hand, to create sufficient fiscal margins of manoeuvre to stimulate reforms and investments in social infrastructure and the climate and digital transitions.
“The aim is to strengthen public debt sustainability through gradual, realistic fiscal consolidation – and to boost sustainable and inclusive growth through ambitious reforms and investments”, said European Commission Vice-President Valdis Dombrovskis.
As expected (see EUROPE 13169/17), the EU institution proposes that Member States develop macro-fiscal plans of at least four years’ duration in which they set out their medium-term fiscal policy and the reforms and investments they will implement. These measures should be in line with the main European policy priorities, such as the ‘European Green Deal’, and be based on the specific socio-economic policy recommendations addressed to them each year. Until 2026, they will be able to draw on the measures contained in the national recovery plan as part of the Next Generation EU Recovery Plan.
Macro-fiscal plans should place the public deficit below 3% of GDP and the public debt above 60% of GDP on a declining path by means of a multi-year expenditure target.
According to the European Commissioner for the Economy, Paolo Gentiloni, “by focusing on expenditure, we also avoid the typical pro-cyclical bias that fiscal policy has had over the past years: namely, we expanded in good times and so we were forced to cut in bad times”.
For countries with deficits or debts above the Maastricht thresholds, the Commission will develop specific trajectories which the countries concerned should use as a basis for their macro-fiscal plans. This will be negotiated with the Commission before being formally approved by the EU Council. And each year, as part of the ‘European Semester’ budget process, each country will have to report on the progress of its plan, a step which will be assessed by the Commission.
A Member State will be able to request a more flexible fiscal consolidation path by extending the duration of its plan to seven years. In exchange, it will have to commit to additional reforms and investments. Nevertheless, the majority of the fiscal effort will have to be made in the first four years of a plan.
In the event of a change of political majority, the nature of the measures in a macro-fiscal plan may also be changed, but the agreed fiscal trajectories should remain faithful to the original plan.
Regardless of the duration of the plan, the debt should have decreased by the end of the period. However, the annual 1/20th reduction rule of the excessive part of the public debt, which has remained unapplied because of its counterproductive character, is bound to disappear.
Additional safeguards for compliance
By giving a Member State more room to shape its fiscal and economic policies, the European Commission intends to act more firmly to enforce European fiscal rules and ensure equal treatment between Member States, while no Member State has ever been subject to the financial sanctions provided for in the Stability and Growth Pact.
The EU institution maintains unchanged the thresholds of 3% of GDP for the public deficit and 60% for the public debt that potentially allow the initiation of excessive deficit procedures.
Mr Dombrovskis spoke of a tightening of the excessive deficit procedure based on excessive pubic debt: this procedure “will be opened by default if countries with substantial debt challenges fail to comply with the rules”.
It remains to be seen what criteria will identify these highly indebted countries. According to a diplomat, the Commission will carry out such an analysis on the basis of the debt sustainability analysis of each State. But, according to this diplomat, countries with debt exceeding 100% of national GDP at the end of 2022 - Greece (171.3%), Italy (144.4%), Portugal (113.9%), Spain (113.2%), France (111.6%) and Belgium (105.1%) - should be concerned.
Furthermore, Mr Dombrovskis warned, “countries will face tighter fiscal requirements if they do not carry out the reforms and investments to which they have committed”.
As for the financial penalties already provided for in EU law, their amount will be reduced to facilitate their application. According to a European official, new sanctions of a reputational nature will be introduced in the event of a breach of the rules, such as the organisation of missions by the EU institutions to an offending country or the summoning of representatives of the country concerned to parliamentary hearings.
Following intense German pressure in recent days, the legislative package introduces additional safeguards for fiscal discipline, but does not go so far as to impose a reduction of public debt of 1% of GDP on all highly indebted countries, as Berlin had demanded.
Thus, any Member State in an excessive deficit situation would be required to make a minimum annual fiscal adjustment equivalent to 0.5% of GDP. The existing rules already provide for such a requirement, but only for countries under a formal excessive deficit procedure.
“Personally, I would not amplify the weight of this measure too much”, Mr Gentiloni said.
See the legislative texts amending the ‘preventive’ and ‘corrective’ arms of the Stability Pact as well as the Directive establishing national fiscal frameworks: https://aeur.eu/f/6kg
Friction in the Franco-German tandem
The legislative package now goes to the EU Council, which hopes for a political agreement before the end of 2023 (see EUROPE 13141/22), and to the European Parliament for adoption under the co-decision procedure. The Swedish Presidency of the EU Council is not expected to put it on the agenda of a formal ministerial meeting until June, so it will be up to the next Spanish Presidency to find an agreement by qualified majority of Member States.
The aim is to apply the future fiscal rules by 2025 at the latest, with 2024 as a transitional year after the thawing of the Stability Pact, scheduled for the end of 2023, and with the early incorporation of some of the provisions of the reform on the table (see EUROPE 13137/6).
On Tuesday, there were many reactions to the Commission’s proposals. German Finance Minister Christian Lindner warned that his country would only agree to a reform that introduced “a reliable path to lower debts”. According to him, the legislative package “does not yet meet the requirements of Germany”. He was supported by the Netherlands, which advocates an ambitious reduction in public debt, greater compliance with the rules and equal treatment of Member States.
His French counterpart, Bruno Le Maire, noted three positive elements of the proposals on the table: “the national differentiation of fiscal trajectories, the principle of national ownership, and taking into account investments and reforms”. Nevertheless, he added, “some points are contrary to the spirit of the reform and need to be reworked”, explicitly citing French opposition to “automatic uniform deficit and debt reduction rules”.
In Parliament, which adopted a common position with little detail in March (see EUROPE 13142/15), the political groups are getting ready to start negotiations.
Markus Ferber (EPP, German) said that “fiscal rules must have more teeth, otherwise they are useless”. Margarida Marques (S&D, Portuguese) stressed the importance of providing the necessary fiscal margin to allow Member States to make the necessary reforms and investments, while ensuring “differentiated and credible” trajectories for reducing national public debts. The absence of a proposal for a “fiscal capacity” at European level is a missed opportunity, she regretted. In the Greens/EFA Group, French MEP Claude Gruffat warned against “repeating the mistakes of the past” by committing the euro area to austerity, following “recent interventions by some Member States”. (Original version in French by Mathieu Bion)