EU Debt Rules to Become More Flexible

EU Debt Rules to Become More Flexible

The European Union (EU) has reached a consensus on new common rules for budget deficits and national debt. The representatives of the EU Parliament and the governments of the member states successfully concluded their prolonged negotiations on Saturday night.

The plan now is for the EU targets aimed at reducing excessive deficits and debt levels to take into account more than ever before, the individual situations of the countries.

Clear minimum requirements

Simultaneously, it is intended to impose clear minimum requirements for reducing debt ratios on highly indebted countries. The finance ministers of the EU member states had already come to an agreement on this matter at the end of the previous year. However, negotiations with the European Parliament were still required.

Struggle for a 3 percent deficit limit

In essence, there exists a rule within the EU that a member state’s debt level must not exceed 60 percent of economic output. In addition, the general government financing deficit – the difference between the income and expenditure of the public budget, which is primarily covered by loans – must be kept to a minimum of three percent of the respective gross domestic product (GDP).

However, this existing rule set for monitoring and enforcing these requirements has long been viewed as overly complicated and stringent by critics. These rules were recently completely suspended due to the Corona crisis and the impact of the Russian attack on Ukraine. Notably, in 2020, the deficits in almost all EU countries were significantly above the three percent threshold.

The plan now is that if the three percent deficit limit is breached, states will be subject to an annual fine and will be required to achieve a structural improvement of at least 0.5 percent of GDP. However, opponents of strict rules ensured that the EU Commission, which is responsible for supervision, should consider the adjustment efforts during a transitional period and increase in interest payments.

Germany and Austria criticized the weakening of the rules

The agreement reached was based on reform proposals from the EU Commission. These proposals were primarily criticized by the German government for excessively weakening the so-called Stability Pact. The finance minister Magnus Brunner (ÖVP) also advocated for “strict, enforceable, and clearly defined debt rules.” After months of negotiations, the governments of the EU states agreed on a number of changes, including, among others, the minimum requirements for reducing debt ratios.

For the reform of the so-called Stability and Growth Pact to be enacted, the agreement now needs to be confirmed by the EU Council of Ministers and the plenary session of the European Parliament. Generally, this confirmation is merely a formality.