On Tuesday 26 November in Strasbourg, the European Commission unveiled its assessment of the national medium-term fiscal-structural plans lasting between four and seven years that twenty-two EU Member States have submitted to it to date, as well as the 2025 draft budgetary plan for seventeen euro area countries.
This package of documents marks “a watershed moment” for the ‘European Semester’ process as “the first step in carrying out the EU’s economic governance reform” applicable from 2025, according to Executive Vice-President Valdis Dombrovskis (see EUROPE 13348/8).
For the European Commissioner for Economy, Paolo Gentiloni, the revised European framework for economic governance “aims to ensure a better balance between fiscal discipline and economic growth” and calibrates “the required adjustment according to each Member State’s specific fiscal challenges”. He noted that the new European fiscal rules make it possible to consolidate public finances while at the same time allowing investment.
As evidence of this, investment financed at national level and/or by EU funds is set to increase by 3.5% in 2025, after 3.4% in 2024.
Of all the EU countries, only Germany, Austria, Belgium and Lithuania have yet to submit a medium-term fiscal-structural plan. For the others, the Commission reports “credible medium-term fiscal trajectories” for twenty countries and proposes that the EU Council adopt the programmes as presented.
Of these twenty Member States, five - Spain, Finland, France, Italy and Romania - require a more flexible fiscal adjustment path, i.e. seven years instead of four (2031 instead of 2028). In order to obtain more time to consolidate their public finances, these five countries have undertaken to carry out structural reforms and additional investments.
Mr Gentiloni indicated that the activation of this provision of the Stability and Growth Pact by these five countries would enable them to “significantly” reduce their annual fiscal consolidation effort, which he now estimates at “around 0.5% of GDP on average”. Nevertheless, he added, this annual effort (0.74 percentage points) remains higher on average than that of countries with a better fiscal situation (0.35 pp).
As additional measures, the European Commissioner cited a comprehensive reform of social security in Finland, investment in the transition of strategic sectors in France, pension reform in Romania, simplification of tax law in Italy and measures to improve the quality of the workforce in Spain.
Initiatives included in the post-Covid-19 national recovery plans, which will be finalised by the end of 2026 at the latest, may be invoked to obtain an extension.
Asked about the French government’s difficulties in getting the 2025 draft budgetary plan adopted, Mr Gentiloni and Mr Dombrovskis hailed the fiscal trajectory as “ambitious”, despite the “challenges” facing France, saying they had not been “lenient” in their assessment.
Of the twenty-two medium-term fiscal-structural plans submitted, only that of the Netherlands does not comply with the rules of the Stability Pact, according to the Commission. According to Mr Dombrovskis, the Dutch government is forecasting annual growth in public spending of 4.2%, whereas the Commission recommends annual growth of 3.2%. The EU institution has suggested that the Netherlands submit a revised plan, a possibility currently being assessed in Amsterdam. In the meantime, the Dutch authorities accept that the Commission will submit to the EU Council the technical trajectory it initially recommended.
2025 Draft Budgetary Plans. The EU institution also assessed the draft budgetary plans of seventeen euro area countries for next year. Austria, Belgium and Spain were unable to submit their drafts, mainly because governments have not yet been formed in Austria and Belgium.
For countries that have submitted medium-term fiscal-structural plans, the 2025 draft budgetary plans correspond to the first year of implementation of their medium-term plan.
The Commission is of the opinion that the draft budgetary plans of eight countries - Croatia, Cyprus, France, Greece, Italy, Latvia, Slovakia and Slovenia - comply with the Eurogroup’s recommendations (see EUROPE 13453/12).
However, the draft budgetary plans of seven other countries - Germany, Estonia, Finland, Ireland, Luxembourg, Malta and Portugal - are not entirely in line with these recommendations.
The trajectory of public spending exceeds the authorised ceiling for Germany, Estonia, Finland and Ireland. It should be noted that Germany will have to wait for a new government to present and adopt the 2025 draft budgetary plan. In Luxembourg, Malta and Portugal, emergency measures to help households and businesses cope with the energy crisis will not be definitively abolished this winter.
In addition, the Netherlands’ fiscal consolidation path is judged not to be in line with the rules of the Stability Pact, while Lithuania’s may not be as well.
Excessive deficit procedures (EDP). On Tuesday, the Commission also unveiled its recommendations for a consolidation path designed to absorb the excessive public deficits identified in eight Member States (see EUROPE 13462/1).
For six countries, the EU institution’s recommendation corresponds to the path set out in their medium-term fiscal-structural plan. France plans to bring its deficit below 3% of GDP in 2029 (-2.8%), Italy in 2026 (-2.9%), Malta in 2027 (-2.9%), Poland in 2028 (-3.0%), Slovakia in 2027 (-1.9%) and Romania in 2031 (-3.0%).
For Belgium and Hungary, in the absence of a validated medium-term fiscal-structural plan, the Commission is basing its recommendation on its own updated trajectory and is setting the target of a return to below 3% of GDP by 2027 for Belgium (-3,0%) and Hungary (-2.5% of GDP).
Finally, for Finland and Austria, the Commission notes that the deficits of these two countries will exceed the threshold of 3% of GDP in 2024. However, as the Finnish deficit is not expected to be excessive in 2025 or 2026, the Commission does not plan to initiate an EDP for Finland.
On the other hand, Austria’s deficit is expected to remain excessive in 2025 and 2026, leading to the opening of an infringement procedure. Nevertheless, the Austrian authorities have indicated that they intend to present measures by January 2025 to bring the national deficit back into line with the Pact. The Commission says it is ready to examine these measures as soon as possible.
It should also be noted that on Tuesday the Commission presented its post-financial crisis surveillance reports for Cyprus, Spain, Greece, Ireland and Portugal.
Next steps. Once installed, the new Commission will decide on the timetable for the presentation of other documents linked to the 2025 exercise of the ‘European Semester’ fiscal process, such as the annual growth review, the fiscal policy recommendation for the euro area [restrictive stance of 0.29 pp] and the joint report on employment.
On Monday 9 December, the Eurogroup will discuss the draft recommendations on the 2025 budgets of the euro area countries and adopt a specific declaration. The recommendations are due to be adopted by the Ecofin Council in January.
To see all the documents presented by the European Commission: https://aeur.eu/f/ehf (Original version in French by Mathieu Bion)