The Council and the European Parliament have reached an agreement on the reform of the EU’s fiscal rules which, after four years frozen by the pandemic, will once again limit the debt and deficit of the Member States, although in a more flexible and adapted way to the situation by country.
After 16 hours of negotiation, the co-legislators have closed a political pact on the preventive component of the economic governance framework that is still subject to the formal approval of both institutions and, once adopted, the text will be published in the Official Journal of the EU to come into effect the next day.
The other two files of which the reform is made up, the regulation on the corrective component and the directive on the requirements for the budgetary frameworks of the Member States, only require that the European Parliament be consulted.
Thus, the Council and Parliament have agreed to maintain the overall reform objective of reducing debt ratios and deficits in a gradual, realistic, sustained and growth-friendly manner, while protecting reforms and investment in strategic areas. such as digital, green, social or defense. At the same time, the new framework will provide adequate scope for countercyclical policies and address macroeconomic imbalances.
The agreement also maintains the obligation for capitals to present medium-term national fiscal structural plans and each Member State must present the first national plans before September 20, 2024. The Commission, for its part, will present a ‘reference trajectory ‘ (previously called ‘technical trajectory’) to countries where public debt exceeds 60% of gross domestic product (GDP) or where the public deficit exceeds 3% of GDP. The provisional agreement provides for an optional and factual prior dialogue between the Member States and the Commission.
The baseline indicates how Member States can ensure that at the end of a four-year fiscal adjustment period, public debt is on a plausible downward trajectory or remains at prudent levels over the medium term.
Furthermore, a Member State may request the submission of a revised national plan if there are objective circumstances that prevent its implementation, even if there is a change of government. Based on the reference path, EU countries incorporate the fiscal adjustment path, expressed as net spending paths, into their medium-term national fiscal structural plans, which must be approved by the Council. The agreement establishes that a control account will record deviations from country-specific net spending trajectories.
The new rules will further encourage structural reforms and public investments for sustainability and growth and Member States will be able to request an extension of the fiscal adjustment period from four years to a maximum of seven years, if they carry out certain reforms and investments that improve resilience and growth potential and support fiscal sustainability and address common EU priorities. These include achieving a just, green and digital transition, ensuring energy security, strengthening social and economic resilience and, where necessary, developing defense capabilities.
Countries with excessive debt will be subject to safeguard rules that will require them, among other things, to reduce their debt by an average of 1% per year if their debt exceeds 90% of GDP, and by 0.5% per year on average if their debt It is between 60% and 90% of GDP, less restrictive provisions than the current requirement that each country must reduce debt annually by 1/20 of the excess above 60%.
If a country’s deficit exceeds 3% of GDP, the requirement will be to reduce it during periods of growth to a level of 1.5% of GDP, in order to create a spending cushion for difficult economic conditions. Other numerical benchmarks for how much the deficit should be reduced per year will also apply.
A country with excess debt will not be required to reduce it to less than 60% by the end of the plan’s period of years, but must have debt that is considered “on a plausible downward trajectory.”
