Twenty-seven countries agree to loosen EU budget rules

“Transitional flexibility.” The Twenty-Seven agreed on Wednesday to loosen European fiscal rules to ensure public finances are restored without harming investment. EU finance ministers have approved “a new economic governance structure that guarantees stability and growth,” the Spanish Presidency of the Council of the European Union rejoiced on X (formerly Twitter).

The reform aims to modernize the Stability Pact, a “fiscal corset” created in the late 1990s that limits each country’s government deficit to 3% of GDP and debt to 60%. By reaffirming these symbolic thresholds, the new text should make the adjustment required of EU countries in the event of excessive deficits more flexible and realistic. This basis, considered too radical, was never really followed.

“Historic agreement!” “, Launched X by French Finance Minister Bruno Le Maire. “For the first time in thirty years, this stability pact recognizes the importance of investment and structural reform,” he welcomed. “The policy of stability is intensifying,” said his German counterpart Christian Lindner. “This agreement provides for fiscal rules adapted to the specific situation of each member state,” emphasized Dutch Minister Sigrid Kaag. From now on, “rules must be more strictly enforced, which has too often been a problem in the past,” she added.

Rification between France and Germany

The agreement was made possible by Tuesday night’s rapprochement between France and Germany, which have long been at odds over the issue. Debt-laden southern European countries such as France have pushed for more flexibility to protect investments needed for a green transition and military spending caused by Russia’s invasion of Ukraine. Conversely, the so-called “lean” Nordic countries, following Germany’s lead, have demanded restrictions to achieve effective EU-wide debt reduction.

The time to conclude the debate was drawing to a close. The Stability Pact was deactivated from the start of 2020 to avoid the collapse of economic activity caused by the Covid pandemic and later the war in Ukraine. It will be resumed on January 1. Failure to agree on new rules before this date could affect the EU’s credibility in relation to financial markets. The Twenty-Seven now hope to complete the legislative process before European elections in June on the text, which remains to be negotiated with the European Parliament.

But unions and environmental groups advocating more green investment have been disappointed. The European Trade Union Confederation called the deal “sabotage” that would harm workers. “This remains a fundamentally bad proposal that will push the European economy further into another recession,” ETUC general secretary Esther Lynch said.

Greenpeace said in a statement that EU finance ministers were “irresponsibly cutting Europe’s capacity to finance the transition to a green economy.” “EU governments want to deliver austerity for people and nature without questioning the billions of public money that subsidize fossil fuels or tax the richest in our societies,” the organization said.

“Transitional flexibility”

Specifically, Brussels proposes that states present their own adjustment trajectory over a minimum four-year period to ensure the sustainability of their debt. Reform and investment efforts will be rewarded by the possibility of extending this fiscal adjustment period to seven years, making it less oppressive. First, management will essentially focus on changes in spending, a metric considered more important than the deficit, which can fluctuate depending on the level of growth.

However, to satisfy Germany, the plan is 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, has secured Berlin to relax these efforts during 2025-2027: during this period, the increase in debt costs associated with high interest rates will be taken into account. “This transitional flexibility will allow us to achieve our investment goals,” the French Ministry of Finance said.

By eliminating the excessive deficit procedure, Germany achieved the addition of a structural government deficit target (without taking into account the impact of the economic situation) of 1.5% of GDP assigned to all member states in order to maintain a margin of safety. % ceiling. This would require an adjustment of at least 0.4 points of GDP per year, which could be reduced to 0.25 points in the event of reforms and investments. In addition, the debt will have to decrease by 1 point per year on average over 4-7 years.

Compared to the old rules, “the deficit target is less restrictive, the pace of achievement is more progressive and rewards investment,” Paris says.