Reform of the Stability Pact: The new rules for EU countries

The economic framework of the European Union is uneven when looking at individual member states as each country has different economic characteristics and indicators. The challenge for the EU is to make it more homogeneous and, in this context, the Stability and Growth Pact (Stability and Growth Pact), an agreement between the 27 member states of the European Union, whose rules “aim to prevent fiscal policy from going in potentially problematic directions” and “correct fiscal deficits or excessive public debt”. The basic premise is essentially that a single state’s internal imbalances and lack of rigor can endanger its stability and that of the EU.

After several shifts of the EU Commissioner for Economics Paul Gentiloni and the Vice President of the European Commission Valdis Dombrowskis presents today, Wednesday, April 26, the legal texts of the waiting period Proposal for the reform of the Stability and Growth Pact. The financial crisis has shown that the Stability Pact was not designed to have any realistic applicability.

“Our fiscal rules date back to the 1990s. We now face different economic priorities and challenges than in the past, and our rules need to reflect these changes. Today’s proposals will ensure further deleveraging of high levels of public debt and help us meet our key reform and investment needs“, Dombrovskis explained in Brussels.

Go beyond the single debt approach

In fact, the European Commission has proposed a new regulation accompanied by a revision of two other pieces of legislation. Brussels has acknowledged that a one-size-fits-all approach has not worked so far. Each country must then create a debt collection plan based on net public spending, what it must become in terms of the community executive the new benchmark for monitoring national budgets.

For countries with high levels of debt, national plans with a four-year term, which can be extended to seven years, must ensure at least ten years of the same public debt reduction without the need for further consolidation measures. An over-indebtedness procedure is initiated if the country fails to meet the forecast development of net government spending. Extenuating circumstances can be considered, but the higher the debt, the less wiggle room.

The historical parameters of Maastricht remain unchanged in the new Stability Pact

The Stability and Growth Pact revolves around two budgetary parameters: the government deficit (ie the difference between revenue and expenditure including interest expenditure) must not exceed 3% of GDP; National debt must not exceed 60% of gross domestic product. Most member countries are very far away from the latter parameter. That is why the Stability Pact provides for an alternative of demonstrating “a decline at a satisfactory pace”. It means that “the gap between a country’s debt level and the 60% reference value must be reduced by one-twentieth per year”, calculated as an average over a three-year period.

Member States submit annual progress reports. The only operational indicator for budgetary surveillance will be primary public spending, with a deep simplification of budgetary rules. For each Member State with a deficit above 3% or public debt above 60% of GDP, the Commission publishes a country adjustment plan. This “technical stance” aims to ensure that debt is brought on a plausible downward path or remains at conservative levels and that the deficit remains below 3% or is reduced and maintained over the medium term. Common safeguards apply to ensure debt sustainability.

in the reform proposal the historical Maastricht parameters of the 3% deficit ceiling and the 60% government debt ceiling remain unchanged. And the rule remains the same as 0.5% for countries that exceed 3% of the annual yield deficit. (The German proposal of 1% annual return is therefore shelved). The government debt ratio must be lower at the end of the plan period than at the beginning of the same period. And even with a seven-year plan, the debt has to be reduced after just four years. Member States benefiting from an extended fiscal adjustment period need to ensure that fiscal efforts are not postponed to later years. In addition, EU countries need to keep net spending growth below their medium-term economic growth rate.

The coded and binding commitment was included in the reform under pressure from Germany, which to date has opposed a reform it considers too tolerant.

The aim of the reform of the Stability Pact

The aim of the proposal is prevent public debt reduction from leading to a fall in investment and growth. Hence the need reform to have clearer and more flexible rules that can be adapted to the needs of each country. “Countries will benefit from a more gradual path of fiscal adjustment if they commit in their plans to implement a set of reforms and adjustment investments that meet specific and transparent criteria“, they report from Brussels. The Pact was suspended in March 2020 due to the economic shock caused by the spread of Covid, but was due to be restored from January 2024.

The infringement procedure

We would like to point out that the EU Commission can initiate proceedings in the event of non-compliance with the limits of the Stability Pact Infringement Proceedings. A first “precautionary” warning is sent to the member country whose deficit is approaching 3%. If the ceiling is breached, the warning turns into a series of recommendations aimed at lowering the deficit/GDP ratio. If the measures taken by the inspected state prove satisfactory, the infringement procedure will be suspended pending a return under the federal umbrella. Otherwise, the country risks a fine.

The excessive deficit procedure for exceeding the 3% deficit remains unchanged. While the excessive deficit procedure related to government debt will be strengthened and will focus on Member States’ deviations from the net spending path that the country has committed to and approved.

Compared to the current pact Sanctions for breach of obligations will be lighter and easier to enforce. was general escape clause retained (activated in March 2020) and is activated in the event of a severe economic downturn in the EU and the Eurozone. In addition, there are country-specific clauses that allow for deviations from spending targets in exceptional circumstances, beyond the Member State’s control and having a significant impact on public finances. The Council decides on the activation and deactivation of these clauses on the basis of a recommendation from the Commission.

the next steps

The proposals, which include minimum debt reduction for the most indebted countries, will now be available discussed by Council and Parliament. The biggest stumbling block in negotiations between Member States is precisely that Germany, which is already at loggerheads because its calls for the introduction of yearly measurable quantitative parameters for public debt reduction have not been accepted, particularly for the most vulnerable countries like Italy. For Germany, as for other “frugal” countries, the Commission has too much discretion. Negotiations will not start until autumn and Ecofin’s goal is to achieve it agreement by the end of the year, so that the first national plans for fiscal consolidation can be prepared by governments with a view to 2025. Until then, the old rules apply, albeit with the precautions published by Brussels in March.