Success reports at night are part of the game for Brussels lawmakers. Saturday morning, 2 a.m., time for the tired look into the camera – group photo. After 16 hours of negotiations, negotiators from the European Parliament and the Belgian Presidency agreed on new debt rules for the member states, a few weeks before the EU elections. This means that new rules will apply in the EU in the future, according to which countries will have to keep their national budgets under control and reduce their debts if they exceed certain limits. The reform will “ensure effective and applicable regulations for all EU countries,” said Belgium’s Finance Minister Vincent van Peteghem.
The agreement does not differ significantly from what the EU member states agreed to shortly before Christmas after difficult negotiations. Accordingly, national governments must continue to keep their respective debt levels below 60 percent of economic output. The annual budget deficit must not exceed three percent of gross domestic product. However, the previous framework within which the EU Commission was supposed to ensure compliance with these rules was considered too narrow and hardly took the individual economic situation of a country into account.
In addition, public budgets are overburdened following the large-scale state aid during the pandemic and the energy crisis. The Stability and Growth Pact, as the guidelines are also known, has been suspended for four years and is due to apply again from this year. That made reform all the more urgent.
Many member states will have to drastically reduce their debt levels
EU Economic Commissioner Paolo Gentiloni was pleased with the agreement reached. The result is very different and more complex than the original proposal the Commission. “But the core elements remain intact: more medium-term planning; greater ownership by Member States within a common framework; a gradual budgetary adjustment to reflect investment and reform commitments,” said Gentiloni.
In the future, the Commission will agree on individual debt reduction plans with those countries whose budgets fall short of the targets. At the same time, uniform minimum standards for dealing with debts and deficits continue to apply. EU states with a debt ratio of more than 90 percent of economic output will have to reduce it by one percentage point per year in the future. With debt between 60 and 90 percent of gross domestic product, it should only be half a percentage point per year. Federal Finance Minister Christian Lindner in particular called for such “protective clauses” and knew that other net contributor states, which support the EU budget and ensure the stability of the euro zone, were on his side.
This also applied to the deficit rules. If a country’s deficit is above the three percent mark, it must be reduced to a level of 1.5% of gross domestic product in growth phases. This is intended to build a buffer for phases of downturn or crises. In general, governments that violate the deficit limit must achieve an “annual structural improvement” of at least 0.5 percent of gross domestic product. As a concession to countries such as France and Italy, the Council had provided for several exceptions. During a transition period until 2027, the Commission can take the increased interest rates into account when calculating the deficit plans. Member states that present reform and investment plans according to certain criteria are given more time to reduce their debts.
The reform was almost completed at the last minute so that it could become law before the European elections at the beginning of June. The Council and Parliament still have to approve the final legal text. In Brussels, last week was considered the last week for all outstanding reform projects in order to reach an agreement between the co-legislators in time. The night session was also due to time pressure.
The new regulations are scheduled to come into force in 2025. During the year, Member States will submit their budget plans to the Commission in accordance with the new standards. Many of them will then have to drastically reduce their debt levels and deficits. According to the EU Commission, the countries in the euro zone were in debt with an average of more than 90 percent of their economic output last year.
Critics expect difficulties even after the reform. They fear, for example, that the new rules will not be enforced as consistently as the Commission and member states hope. Or they expect too much austerity pressure in economically difficult times: Such strict budget consolidation “makes little sense given the economic environment and the EU’s political and geostrategic priorities,” says Mujtaba Rahman, EU expert at the consulting firm Eurasia Group.