Spain's First Deputy Prime Minister and Economy Minister, Nadia Calvino (L), speaks with French Minister of the Economy, Finance and Recovery, Bruno Le Maire, at the start of the European Finance Ministers Council in Brussels, Belgium. EPA-EFE/OLIVIER HOSLET


EU strikes fiscal rules deal with gradual path to cut debt


European Union finance chiefs ended months of wrangling over fiscal rigour to agree on new rules that will aim to rein in debt and define the bloc’s ability to invest in key sectors such as defence for years to come.

In the end, the unanimous deal among 27 member states was clinched on a video conference that lasted less than two hours, concluding negotiations launched just before the Covid pandemic.

Wednesday’s agreement introduces more flexibility for fiscal adjustments, while Berlin succeeded in introducing safeguards to ensure common debt reduction and the building up of buffers to absorb future shocks.

The overhaul also aims to give capitals a bigger say in how they rein in public finances while improving enforcement where limits are exceeded. Yet a goal of simplifying budgetary oversight proved elusive, as the final compromise forced negotiators to add demands from each camp.

The fiscal rules that bind the euro area’s eclectic economies exist to bring down deficits and put limits on how much debt governments can build up. The old rules were suspended to allow spending leeway during the pandemic and energy crisis, and are considered to be outdated.

via Bloomberg

“The rules are more realistic, they respond to the post-pandemic reality, and they incorporate also the lessons learned from the great financial crisis,” Spanish Economy Minister Nadia Calvino told a news conference after the deal was reached. Her country holds the rotating EU presidency and has been leading negotiations.

Efforts to agree on a new framework exposed differences between hawkish countries led by Germany that called for strict targets to reduce debt, and those led by France and Italy that were concerned about the need to finance the defence and digital industries, as well as the green transition.

After months of technical discussions led by Spain, Paris and Berlin resolved the remaining differences between the EU’s two biggest economies late on Tuesday with a deal they saw as the basis for the wider agreement.

“These rules will guarantee financial stability and sound public finances everywhere in Europe for the years ahead,” French Finance Minister Bruno Le Maire said in a video posted on the X social media platform. “For the first time in 30 years, this stability pact recognizes the importance of investment and structural reforms.”

Italy’s Giancarlo Giorgetti, who last week expressed doubts that a deal could be reached, said in a statement that the new framework is more realistic and called it a positive development.

New EU Fiscal Rules in Numbers:
  • Countries with debt over 90 per cent of GDP must trim it by one percentage point of GDP during an adjustment period; countries with debt between 60 per cent and 90 per cent will have to make half that effort
  • Member states will have to create a fiscal buffer of 1.5 per cent of GDP below the mandatory three per cent threshold; to build this buffer, the annual adjustment should be of 0.4 per cent of GDP, which could be reduced to 0.25 per cent of GDP in case of an extension of the adjustment period
  • Governments will be allowed to deviate from net expenditure path by 0.3 per cent of GDP annually and 0.6 per cent of GDP cumulatively during the monitoring period
  • Countries will be able to extend adjustment period from four to seven years by using investment and reforms included in their Covid recovery plans
  • For countries breaching deficit rules that have to make an annual fiscal effort of a half point of GDP, increased interest payments will be excluded from the calculation in 2025-27
  • Thresholds of three per cent of GDP for deficit and 60 per cent of GDP for debt remain

On Wednesday’s video conference, finance ministers needed to finalize outstanding issues that included a key indicator based on net expenditure designed to monitor whether national economies are sustainable.

Member states also disagreed until the last minute over the pace at which deficits should come down to 1.5 per cent of gross domestic product, with the aim of creating a fiscal buffer below the 3 per cent threshold.

The new fiscal rules will grant member states some leeway on military spending, as Russia’s invasion of Ukraine has brought defence to the top of the priority list. By investing in common EU priorities, including the green transition and digital and defence industries, the period during which a country has to balance its public accounts may be extended to seven years from four.

The old rules are due to be reinstated in January, and left unchanged would bring back stricter debt limits that are tough for some governments to swallow. Ministers wanted a political deal before year-end to allow time to conclude the legislative reform by spring — ahead of EU elections in June — so it can be in place for the next budgetary cycle.

Negotiators from the EU’s main institutions will hash out the final details of the new economic governance framework before it’s put to a vote at the European Parliament.