On Wednesday 3 June, the European Commission unveiled its package of fiscal, economic and social policy recommendations for European Union Member States as part of the ‘European Semester’ process.
“The European economy continues to demonstrate resilience as it navigates one crisis after another. But there remains an urgent need for Europe to act to enhance its competitiveness”, said the European Commissioner for Economy, Valdis Dombrovskis.
Year on year, the recommendations that EU countries are invited to incorporate into their draft budget plan for 2027 are converging: - boosting economic competitiveness by easing administrative burden, removing barriers fragmenting the single market and focusing on innovation; - strengthening strategic autonomy and decarbonisation of the economy by reducing dependence on fossil fuels, particularly imported ones.
In addition to recommendations on social policy and employment (see EUROPE 13880/6), the European Commission stresses the importance of maintaining prudent fiscal policies. In a context marked by soaring energy prices caused by the war in the Middle East, this means ensuring that emergency measures taken to relieve the households and businesses most affected are precisely targeted, temporary and consistent with the EU’s climate objectives.
The new element in the ‘European Semester’ package is the Commission’s announcement that it will grant flexibility for energy-related public spending to Member States that already benefit from fiscal room for manoeuvre (1.5% of national GDP each year over the 2026-2028 period) to increase their military expenditure (see EUROPE 13879/22).
“We have decided that measures to strengthen the structural resilience of the European energy system and accelerate the transition away from fossil fuels may benefit from the existing flexibility within the fiscal framework. Upon request by a Member State, the scope of the current National Escape Clause for defence can be broadened”, Mr Dombrovskis stated.
The 17 countries currently concerned will be able to make energy-sector investments within the following constraints: - this spending will remain within the scope of the 1.5% of national GDP margin already granted for military expenditure; - it will be limited to a cap of 0.3% of national GDP per year; - cumulatively, it will amount to less than 0.6% of national GDP over the 2026-2028 period.
To preserve equal treatment, Estonia and Latvia, the two Member States that have already reached the maximum flexibility threshold of 1.5% of GDP for their military expenditure, will nevertheless be able to benefit from it, provided that they demonstrate that they are preserving the sustainability of their public finances.
The Commission will shortly send a note to EU Council experts detailing the energy expenditure eligible from February 2026, such as aid for clean energy production, the installation of less polluting heating systems, and the purchase of electric vehicles.
A European source said they were “doubtful” about the inclusion of investments in gas-fired power plants. Likewise, aid aimed at reducing the taxation of fossil energy products will not be included in the fiscal flexibility margin.
Stability Pact. On Wednesday, the Commission also took stock of how Member States are applying the Stability and Growth Pact, in particular compliance with their public expenditure growth trajectory.
As regards the 10 countries - Austria, Belgium, Finland, France, Italy, Hungary, Malta, Poland, Slovakia and Romania - already subject to an excessive deficit procedure (EDP), there is “no reason” to move to the next stage in the procedure for nine of them, insofar as those countries are complying “sufficiently” with their expenditure growth trajectory, this European official noted.
As regards Malta, the deficit of which stood at -2.2% of GDP at end-2025, the EDP is expected to be abrogated.
See the Commission recommendation: https://aeur.eu/f/m5s
Nevertheless, for France, the Commission sees a risk of non-compliance with the agreed trajectory (1.4% in 2026 instead of 1.2%).
Above all, in Hungary, the fiscal situation inherited from the Orbán years points to significant slippage: the Hungarian deficit could reach 7% of GDP in 2026 after 4.7%, whereas it should be brought back below the 3% threshold this year (see EUROPE 13877/27). The Commission takes the view that it is appropriate to wait until the autumn to see more clearly there, as the Hungarian government hopes for the unblocking of European funds in the form of grants (see EUROPE 13877/1) and will revise the national fiscal trajectory.
Bulgaria. The Commission suggests opening an EDP against Bulgaria, the excessive deficit of which reached -3.5% of GDP in 2025 and is expected to rise to -4.1% in 2026. It will present a specific recommendation in the event of a positive response from Council experts.
According to this European source, the slippage observed in this country, which joined the euro area at the beginning of the year, can be explained, for 2025, by military expenditure. For 2026, other factors come into play, such as the increase in civil servants’ salaries as well as political instability, which limits control over public finances.
As for the other EU countries the deficits of which exceeded -3% of GDP in 2025, but which are not subject to measures under the ‘corrective’ arm of the Pact, the Commission concluded that there are no grounds for opening an EDP. These are “Germany, Estonia, Latvia and Slovenia”, Mr Dombrovkis said.
On Wednesday, the Commission also gave its assessment of the revision of the Netherlands’ medium-term fiscal programme, the deficit of which is expected to rise from -1.6% to -2.5% of GDP between 2025 and 2026. The following net expenditure growth trajectory is therefore suggested: 4.7% in 2026, 3.5% in 2027, 3.1% in 2028, 3.5% in 2029 and 3.7% in 2030.
See the Commission assessment: https://aeur.eu/f/m5r
Macroeconomic imbalances. The Commission also delivered its analysis of the macroeconomic imbalances identified in seven Member States (see EUROPE 13759/14). It notes that the imbalances observed in Greece, linked to public debt and the stock of non-performing bank loans, those observed in the Netherlands, linked to household debt, and those observed in Sweden, linked to the commercial property market, have been corrected.
Macroeconomic imbalances remain in Italy, Hungary, Slovakia and Romania. They appear excessive in the latter country.
It should also be noted that the EU institution published its assessment of the euro area countries - Cyprus, Greece, Ireland, Portugal and Spain - that were subject to a fiscal bailout during the sovereign debt crisis.
See all the documents in the ‘European Semester’ package: https://aeur.eu/f/m5p (Original version in French by Mathieu Bion)