ESM – euro protective shield for higher debt limits – economy

In the debate on reforming the European Stability and Growth Pact, experts from the euro protection umbrella (ESM) propose a higher debt limit. The economists advocate raising the limit for general government debt from the maximum permitted 60 percent of gross domestic product to 100 percent of economic output. The maximum permissible annual budget deficit should remain unchanged at three percent. The authors formulate a “two-pillar approach” that uses an upper limit for the budget deficit of three percent and a reference value for the general government debt of 100 percent, which includes an expenditure rule. The spending cap should be based on the trend growth of a country. A reform of the pact is possible without a treaty change.

Because of the Corona crisis, the debt and deficit rules are to remain suspended in 2022 as they stand. The general escape clause provided for in the pact was used in the event of a crisis. After taking on record debts in the corona pandemic, the EU Commission wants to simplify the budget rules. Debt would have to be reduced gradually and in a realistic way so as not to jeopardize growth. The regulations were tightened after the financial crisis in 2011 and 2013, but are considered complicated and often politically difficult to enforce.