BRUSSELS ― EU finance ministers on Wednesday clinched a deal to overhaul the bloc’s spending rules that will enable countries more time to rein in spending.
After weeks of fraught negotiations, governments finally agreed to the reformed framework that will set out a laxer pace of debt and deficit reduction than had previously been the case.
“The rules are more realistic ,” Nadia Calviño, finance minister of Spain, which holds the rotating EU presidency, told reporters on Wednesday evening. “They respond to the post-pandemic reality and they incorporate also the lessons learned from the great financial crisis. And I think that from this point of view there is increased ownership.”
The decision was taken at a virtual meeting and followed a dinner between the French and German finance ministers in Paris on Tuesday night.
The so-called Stability and Growth Pact (SGP) was put on hold at the start of the COVID-19 pandemic to allow governments to increase spending in the wake of the worst recession since World War II. The European Commission proposed changing the old rules because of concerns that they were outdated, inflexible and barely enforceable.
The new format is designed to offer more gradual and tailored spending cuts for countries exceeding the EU’s threshold of 3 per cent deficit-to-GDP and 60 percent debt-to-GDP.
Power trio
Several eurozone countries, including France and Italy, have deficits above the 3 percent threshold. The Commission is expected to slap these countries with its sanctions mechanism ― known as the excessive deficit procedure (EDP) ― in spring 2024.
Weeks of shuttle diplomacy between the EU’s power trio ― Berlin, Paris and Rome ― delivered a breakthrough.
The agreed text proposes to extend the deadline for countries facing an EDP if the EU economy is in dire straits and foresees a three-year transition phase where a smaller fiscal adjustment is required from them.
In the short-term, EU capitals agreed to deduct soaring interest rates from the fiscal adjustment required from countries under an EDP. These looser rules will apply from 2025-2027 and are designed to soften the blow for countries that are expected to exceed the EU’s deficit threshold in the coming years.
However, in a key win for Berlin, the deal also requires EU capitals to keep their annual deficits at around 1.5 percent of GDP. This so-called “fiscal buffer” is designed to give countries wiggle room to increase spending to cope with an unforeseen crisis without breaching the 3 percent deficit threshold.
The finance ministers agreed that countries with a debt-to-GDP proportion above 90 percent should reduce the ratio by an annual average of 1 percent within a four or five-year time frame that can be extended to seven. Instead, a lower adjustment rate of 0.5 percent would apply to countries with a debt ratio between 60 and 90 per cent.
At the beginning of each cycle, the Commission will set out a spending program – known as net expenditure path – for each member country to ensure that they meet the EU’s targets at the end of that period. This plan is tailored to each state and is based on structural factors such as long-term growth estimates and expected demographic changes.
The size of the fiscal adjustment under the EDP will always exceed what is normally expected from EU countries, said an EU official closely involved in the proceedings who was not authorized to go on the record.
Wednesday’s deal clears the way for the start of negotiations between member countries and the European Parliament in early 2024.
