Representatives of the European Parliament and the Belgian Presidency of the Council of the European Union reached a provisional political agreement on the revision of the Stability and Growth Pact during the night of Friday 9 to Saturday 10 February, after a trilogue negotiating session lasting sixteen hours (see EUROPE 13347/2).
If they are ratified before the end of the current legislative cycle, the future fiscal rules are expected to apply from 2025. The year 2024 will be a period of transition, during which the current rules will be applied in the spirit of the legislative revision and in which the Member States will present their multiannual macro-fiscal plans starting in 2025 by the end of September, on the basis of the reference trajectory established in the spring by the European Commission.
As revised, the Stability and Growth Pact seeks to strike a balance – repeated over and over again by the interinstitutional trio – between realistically consolidating public finances (after several years of increased indebtedness due to the Covid-19 pandemic and the energy crisis) and maintaining a fiscal margin of manoeuvre that allows Member States to continue investing in the EU’s four political priorities, namely green and digital transitions, energy security and defence.
“The new rules will significantly improve the existing framework and ensure effective and applicable rules for all EU countries” said Belgian Finance Minister Vincent Van Peteghem in a press release.
For the European Commissioner for Economy, Paolo Gentiloni, the texts adopted are admittedly “more complex” than the European Commission’s initial proposal, but “they preserve its core elements: more medium-term planning; greater ownership by Member States within a common framework; a more gradual fiscal adjustment to reflect commitments to investments and reforms”.
A new procedure integrated into the ‘European Semester’
For countries whose debt exceeds 60% of national GDP or whose public deficit exceeds 3% of GDP, the European Commission will submit a ‘reference trajectory’ following dialogue with the country concerned. This will set out the fiscal and economic policy to be pursued to ensure that the country concerned manages to put its excessive public debt back on a credible reduction path at the end of the period (between four and seven years) agreed by common accord.
But “this is only a reference trajectory”, pointed out Stéphanie Yon-Courtin (Renew Europe, French), responding to EUROPE, arguing that a Member State could be authorised to follow a higher net expenditure trajectory if it provided solid arguments validating its own parameters.
This reference trajectory, which will be the sole responsibility of the Commission, will incorporate two quantitative criteria imposed by countries such as Germany that prioritise fiscal discipline. Firstly, countries whose public debt exceeds 90% of national GDP will have to reduce their debt by 1% a year, and those whose debt is between 60 and 90% of national GDP by 0.5% a year.
Secondly, MEPs accepted a number-cased criterion for the public deficit in order to create room for fiscal manoeuvre in the event of a crisis. Countries whose public debt exceeds 90% of GDP will have to reduce their deficit to 1.5% of GDP, while those with an excessive debt of between 60% and 90% of GDP will have to bring their deficit below 2% of GDP. According to a European Parliament press release, the excessive deficit will only be reduced in periods of economic growth.
Taken together, these number-based parameters will make it possible to establish a net expenditure path tailored to the specific situation of a State, enabling public finances to be kept under control and debt to be gradually reduced.
Member States will incorporate the net expenditure path into their multiannual macroeconomic plans, which will detail their fiscal policy and the reforms and investments they intend to carry out over the duration of this plan of at least four years. They will have to explain how their investments fit in with the EU’s four political priorities.
A State may request an extension to the duration of the plan, up to a maximum of seven years, by justifying the reforms and additional investments it will make. During the first cycle, the reforms and investments included in the post-Covid-19 national recovery plans can be included in a macro-fiscal plan.
It will be up to the EU Council to ultimately approve the multiannual macroeconomic plans.
Greater fiscal leeway
In order to create additional room for manoeuvre for investments, MEPs have obtained the possibility of excluding national co-financing for projects receiving European funds from the calculation of net budget expenditure.
“It’s not the agreement of our dreams, but we have made progress, especially in the area of investment. National co-financing will no longer be taken into account when calculating net budget expenditure. The EU Council proposed a ceiling of 0.1% of GDP, the European Parliament’s position was a threshold of 0.25%. In the end, the EU Council accepted an exemption without any limit”, Margarida Marques (S&D, Portuguese), the European Parliament’s co-rapporteur, told EUROPE on Monday 12 February.
According to a parliamentary source, this provision will be of real importance in the negotiations on the post-2027 Multiannual Financial Framework.
Each year, a Member State will present a progress report on the implementation of its multiannual macro-fiscal plan as part of the 'European Semester' fiscal process. In a crisis situation, it will even be able to ask to derogate from its obligations by activating an escape clause in the Pact, as was done at EU level to deal with the pandemic in spring 2020.
Under the ‘corrective’ arm of the Stability Pact, the Commission will monitor the annual evolution of a Member State's expenditure via a control account, which will make it possible to track downward/upward deviations from the set trajectory of net budget expenditure. In line with the EU Council’s wishes, the Commission will have to present a report (based on Article 126(3) TFEU) when the deviations observed in a control account exceed 0.3% of GDP annually or 0.6% of GDP cumulatively over several years.
This stage could ultimately lead to the opening of an Excessive Deficit Procedure (EDP) based on public debt. However, a number of relevant factors may be taken into account in the analysis in order to justify a deviation and avoid the opening of a procedure, such as the increase in military spending, in particular to support Ukraine in the face of the Russian military invasion.
“We also considered that investment in recovery plans could be taken into account as a relevant factor”, added Ms Marques.
In addition, the co-rapporteur pointed out that MEPs had included the concept of ‘social convergence’ in the future Pact. “It is now clear that economic cooperation has an important social dimension”, she added. A joint meeting of European finance and social affairs ministers will be held on Tuesday 12 March.
Ms Marques and Ms Yon-Courtin also spoke of the importance of new provisions to strengthen ownership of the rules at national level, with greater involvement of the social partners and local authorities in drawing up and monitoring multiannual plans. The European Parliament will play a more important role by having access to more information and by holding specific dialogues during plenary sessions.
Gathering a majority in the European Parliament
The provisional agreement on the revision of the Stability Pact still has to be formally validated by Parliament and the EU Council. The Member States’ ambassadors to the EU (Coreper) will be informed of the agreement on Wednesday 14 February.
In Parliament, the support of the EPP and Renew Europe groups seems to have been secured. “We are satisfied, even if we would have liked to see less arithmetic”, said Ms Yon-Courtin. She added: “On the number-based criteria, we have stayed with the December Ecofin Council. That's the ‘responsibility’ part. However, there is also the ‘flexibility’ aspect in the way investments are taken into account in the main strategic priorities, such as the reference to the Climate Act, which gives us a long-term vision”.
The S&D group could be divided. The German and Nordic Social Democrats are expected to approve the agreement. The Spanish and Portuguese Socialists might find it easier to accept with the provision for exemption from national co-financing. The Italian Socialists could be tempted to abstain, while the French Socialists might vote against after having already opposed Parliament’s position.
The Greens/EFA and The Left groups will vote against. Co-Chair of the Greens/EFA group, Belgian MEP Philippe Lamberts, speaking on X, said that Parliament, refusing to contemplate a failure of the negotiations, had “capitulated” to the EU Council, which was itself opposed to any renegotiation of the number-based criteria. As for Martin Schirdewan (The Left, German), he predicted a new “euro crisis” due to the return of economic austerity. (Original version in French by Mathieu Bion)