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The EU Council of Ministers today finally decided on a reform of the stability and growth package. What this includes and which debt rules will apply in Europe in the future.
In the European Union (EU), new regulations for national debt and budget deficits of the member states will apply in the future. After the EU Parliament gave its approval last week, the Council of Ministers in Luxembourg today finally approved the reform plans for the so-called Stability and Growth Pact, as EU diplomats confirmed to the German Press Agency.
What is the Stability and Growth Pact?
The Stability and Growth Pact, which was enshrined in the Treaty of Amsterdam in 1997, primarily imposes debt ceilings on the member states of the European Economic and Monetary Union. The set of rules is intended to ensure budget discipline in the states and guarantee sound public finances. These are considered an important prerequisite for stability in the EU and the euro area.
The agreement imposes sanctions on those member states whose public budget deficit ratio is above three percent. The deficit ratio determines the percentage ratio of a state’s deficit to its nominal gross domestic product (GDP). If the upper limit is exceeded, debt criminal proceedings, so-called deficit proceedings, can be initiated. Then a country must take countermeasures and correct the budget to reduce the deficit.
In addition, the pact also includes a debt ratio according to which the debt level cannot be higher than 60 percent of GDP. Most recently, 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.
Why is the Stability and Growth Pact being reformed?
The current set of rules for monitoring and enforcing these requirements has long been viewed by critics as too complicated and too strict. The agreement now reached to reform the rules dating back to the 1990s was based on proposals from the EU Commission. However, these were criticized, especially by the federal government, as being too far-reaching a weakening of the so-called Stability and Growth Pact. The governments of the EU states therefore agreed on a number of changes after months of negotiations.
What does the reform prescribe now?
In principle, under the new regulations in the EU, the debt level of a member state must not exceed 60 percent of economic output. The general government financing deficit – i.e. the gap between income and expenditure in the public budget, which is primarily covered by loans – should also continue to 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 (debt levels of over 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.
What are the reactions?
Even before the reform, critics always emphasized that the debt rules were cutting off the necessary investments in climate protection or the social sector, for example. 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 therefore 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 and CSU MP Markus Ferber.
What happens next?
Once confirmed by EU countries, the new rules still need to be published in the EU Official Journal in order for them to come into force. This is expected to happen at the beginning of May. 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.