New fiscal rules for the European Union would require cuts in net public spending next year, but critical investment needs would remain paramount, euro zone finance ministers declared on 11 March.
Based on the latest available data, the requirements of the revised economic governance framework would translate into an overall slightly contractionary fiscal stance in the euro area in 2025.
The Eurogroup’s announcement followed warnings from several experts that the so-called “revised economic governance framework,” agreed in trilogue discussions last month, risked jeopardising the EU’s ability to meet its goal of zero carbon emissions by 2050.
It also comes against a backdrop of ongoing fiscal retrenchment across the EU: according to the European Commission’s latest forecast, the bloc’s overall budget deficit will fall from 3.2 per cent to 2.8 per cent this year. However, Pierre Gramegna, the managing director of the European Stability Mechanism (ESM), denies that member states’ compliance with the new fiscal constraints will lead to a reduction in public investment.
“The focus should be… on cutting less productive expenditures, in particular, I think energy support measures, and on the other side and to avoid [a reduction of] public investment. Only if we manage to not reduce public investment will it be possible to boost the competitiveness of our European economies.”
EU Economic Commissioner Paolo Gentiloni also highlighted the “enormous amount of investment” needed by the EU to meet its climate, digital, defence and social spending targets. Gentiloni suggested that much of the necessary investment would ultimately come from the private sector.
It is what it is. This [investment] will mostly be coming from private resources and all of the discussion we are having on Capital Markets Union is also addressed to this.
The new EU budget rules, first proposed by the European Commission in April 2023, amend the rules enshrined in the Stability and Growth Pact (SGP) in the 1990s.
Member states that breach the restrictions must follow individualised budget plans set out by the European Commission, detailing how they can ensure compliance with fiscal policy over a four-year period. Nevertheless, the new rules retain numerical benchmarks that all member states must adhere to.
Therefore, countries with debt to annual GDP ratios above 90 per cent should reduce their deficits by an average of one percentage point annually, while countries with debt levels between 60 per cent and 90 per cent of annual debt should reduce their debt by an average of 0.5 percentage points each year.
The SGP programme was suspended in 2020 to allow for increased deficit spending during the COVID-19 pandemic. The suspension was later extended to 2024 after the outbreak of war in Ukraine in February 2022, leading to a sharp rise in energy prices across the EU.
