European Union
New debt rules for EU states have been decided
National debt and budget deficits in the EU have been intended to be reformed for years, and in recent months the plans have become more concrete. Now the reform is in place.
In the European Union, new regulations will apply in the future for national debt and budget deficits of the member states. In Luxembourg, the Council of Ministers finally approved reform plans for the so-called Stability and Growth Pact, as EU diplomats confirmed to the German Press Agency.
The confirmation by the Council of the European Union was the last necessary step for the long-planned reform of the regulations. Among other things, it imposes debt ceilings on states. Accordingly, in the future there should be clear minimum requirements for how highly indebted countries can reduce their debt ratios. At the same time, EU targets should take greater account of the individual situation of countries.
Last week, the European Parliament in Strasbourg approved the reform plans. After confirmation by EU countries, the new regulations must now be published in the EU Official Journal so that they can come into force. This is expected to happen at the beginning of May.
What is the Stability and Growth Pact?
The set of rules is intended to ensure budget discipline in the states and thus guarantee sound public finances. These are considered an important prerequisite for stability in the EU and the euro area. If the upper limits are exceeded, debt criminal proceedings, so-called deficit proceedings, can be initiated. A country must then take countermeasures to reduce debt and deficit.
The previous rules from the 1990s have long been viewed by critics as too complicated and too strict. Most recently, the criminal proceedings were completely suspended due to the Corona crisis and the consequences of the Russian attack on Ukraine. In 2020 in particular, the deficits in almost all EU countries were well above the three percent mark.
What should apply in the future
In principle, under the new regulations in the EU, the debt level of a member state must not exceed 60 percent of economic output. In addition, the general government financing deficit – i.e. the gap between income and expenditure in the public budget, which is primarily covered by loans – should be kept below three percent of gross domestic product (GDP).
In the future, according to the plans, the individual situation of countries will, among other things, be given greater consideration. The EU Commission, which is responsible for supervision, should be able to take the increase in interest payments into account during a transitional period when calculating adjustment efforts. If Member States submit credible reform and investment plans that improve resilience and growth potential, the period for debt reduction should also be extended.
In addition, protective measures are planned: highly indebted countries with a debt level of more than 90 percent should have to reduce their debt ratio by one percentage point annually, and countries with debt levels between 60 and 90 percent by 0.5 percentage points.
Why the new regulations are controversial
Critics always emphasize that the rules cut off necessary investments, for example in climate protection or the social sector. An analysis by the European Trade Union Confederation (ETUC) and the New Economics Foundation (NEF) came to the conclusion at the beginning of April that if the planned rules were adhered to, only Denmark, Sweden and Ireland would be able to afford necessary expenses from 2027 onwards. It was said that investments would also be severely inhibited in Germany. The Greens in the European Parliament are also very critical of the reform. It does not meet the needs of the time, said MEP Henrike Hahn.
Federal Finance Minister Christian Lindner, however, is satisfied. Germany’s central concern – “financial stability” – is reflected in the legal texts, the FDP politician recently said. “We get clear rules for debt reduction, which can then be enforced with a realistic perspective.” The Christian Democratic EPP group in the European Parliament also spoke out in favor of the reform. The new set of rules creates more clarity and puts the economic and monetary union on a solid foundation, said economic policy spokesman Markus Ferber (CSU).
How it goes on
The deficit procedures should be able to be reopened from this spring – in all likelihood the new rules will already apply by then. According to the latest data from the EU statistics office Eurostat, several countries broke the upper limits last year.