The Twenty-Seven agreed on Wednesday on a relaxation of European budgetary rules, which should guarantee the recovery of public finances without compromising investments. EU Finance Ministers have approved “a new economic governance framework that guarantees stability and growth”, rejoiced the Spanish Presidency of the Council of the European Union on X (ex-Twitter). The reform intends to modernize the Stability Pact, a “budgetary corset” created at the end of the 1990s which limits the public administration deficit for each country to 3% of GDP and the debt to 60%.
While confirming these emblematic thresholds, the new text must make the adjustment requested from EU countries in the event of excessive deficits more flexible and realistic. Considered too drastic, this framework has never really been respected. “Historic agreement!”, launched on X the French Minister of Finance, Bruno Le Maire. “For the first time in thirty years, this stability pact recognizes the importance of investments and structural reforms,” he welcomed. “The stability policy is being strengthened,” said his German counterpart Christian Lindner.
Rome considered for its part that this agreement is “realistic”, in which there are “positive things and others less”, the result of “an inevitable spirit of compromise” in the EU. “There are positive things and others less, but Italy has nevertheless obtained a lot and above all, what we are signing is a lasting agreement for our country which aims on the one hand at a realistic and progressive reduction in debt and on the other hand adopts a constructive approach towards investments,” declared Economy Minister Giancarlo Giorgetti, quoted by the agencies.
“This agreement provides for budgetary rules adapted to the specific situation of each Member State,” underlined Dutch Minister Sigrid Kaag. From now on, “the rules must be better respected, which has too often been a problem in the past,” she added. The agreement was made possible by a rapprochement sealed Tuesday evening between France and Germany, long at odds on the subject. The indebted countries of southern Europe, like France, insisted on additional flexibilities in order to protect the investment necessary for the green transition and the military spending generated by Russia’s invasion of Ukraine .
Conversely, the so-called “frugal” countries of northern Europe, behind Germany, demanded constraints to achieve effective debt reduction throughout the EU. Time was running out to conclude the debates. The Stability Pact has been deactivated since the beginning of 2020, in order to avoid a collapse in economic activity affected by the Covid pandemic and then by the war in Ukraine. It will be reactivated on January 1st. A lack of agreement on the new rules before this date would have affected the credibility of the EU vis-à-vis the financial markets. The Twenty-Seven now hope to conclude the legislative process before the European elections in June on this text, which must still be negotiated with the European Parliament.
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Concretely, Brussels is proposing that States present their own adjustment trajectory over a period of at least four years in order to ensure the sustainability of their debt. Reform and investment efforts would be rewarded by the possibility of extending this budgetary adjustment period to seven years, so that it is less brutal. Above all, management would essentially focus on changes in spending, an indicator considered more relevant than deficits which can fluctuate depending on the level of growth.
In order to satisfy Germany, however, it is planned that all countries with excessive deficits will be forced to make a minimum effort to reduce the deficit ratio by 0.5 points of GDP per year. Paris, however, obtained from Berlin a relaxation of this effort over 2025-2027: over this period the increase in the cost of debt linked to high interest rates will be taken into account. “This transitional flexibility will allow us to achieve our investment objectives,” says the French Ministry of Finance.
Excluding the procedure for excessive deficits, Germany obtained the addition of a structural public deficit objective (excluding the impact of the economic situation) at 1.5% of GDP assigned to all Member States, in order to preserve a margin of safety. compared to the 3% ceiling. To achieve it, an adjustment of at least 0.4 points of GDP per year will be required, which can be reduced to 0.25 points in the event of reforms and investments. In addition, the debt will have to fall by 1 point per year on average over 4 or 7 years. Compared to the old rules, “the deficit objective is less restrictive, the pace of reaching it is more progressive and rewards investment”, it is argued in Paris.
