Finance: New debt rules for EU states clear the last hurdle

Finance: New debt rules for EU states clear the last hurdle

Europe’s new rules for budget deficits and national debt have been discussed for a long time – a compromise has been reached, even if it is controversial. A council of ministers should now give the final green light.

New rules for national debt and budget deficits in the EU should now clear the final hurdle. After a long debate, the states agreed with the European Parliament on a controversial reform of the so-called Stability and Growth Pact, which, among other things, stipulates upper debt limits for the states. Accordingly, clear minimum requirements for reducing debt ratios for highly indebted countries should apply in the future. At the same time, EU targets should take greater account of the individual situation of countries.

In order to enable the reform to come into force quickly, the final formal decisions will be taken today at a Council of EU Agriculture Ministers. Such an approach is not unusual when legal texts have been completely negotiated and adoption can take place without further discussion. Last week the European Parliament also gave the necessary approval.

What the Stability and Growth Pact is

The set of rules is intended to ensure budget discipline in the states and thus guarantee sound public finances. These are considered an important prerequisite for stability in the EU and the euro area. If the upper limits are exceeded, debt criminal proceedings, so-called deficit proceedings, can be initiated. A country must then take countermeasures to reduce debt and deficit.

The previous rules from the 1990s have long been viewed by critics as too complicated and too strict. Most recently, criminal proceedings were completely suspended due to the Corona crisis and the consequences of the Russian attack on Ukraine. In 2020 in particular, the deficits in almost all EU countries were well above the three percent mark.

What should apply in the future

In principle, under the new regulations in the EU, the debt level of a member state must not exceed 60 percent of economic output. In addition, the general government financing deficit – i.e. the gap between income and expenditure in the public budget, which is primarily covered by loans – should be kept below three percent of gross domestic product (GDP).

In the future, according to the plans, the individual situation of countries will, among other things, be taken more into account. The EU Commission, which is responsible for supervision, should be able to take the increase in interest payments into account during a transitional period when calculating adjustment efforts. If Member States submit credible reform and investment plans that improve resilience and growth potential, the period for debt reduction should also be extended.

In addition, protective measures are planned: Highly indebted countries (debt levels of over 90 percent) should have to reduce their debt ratio by one percentage point annually, and countries with debt levels between 60 and 90 percent by 0.5 percentage points.

Why the new regulations are controversial

Critics always emphasize that the rules cut off necessary investments, for example in climate protection or the social sector. An analysis by the European Trade Union Confederation (ETUC) and the New Economics Foundation (NEF) came to the conclusion at the beginning of April that if the planned rules were adhered to, only Denmark, Sweden and Ireland would be able to afford necessary expenses from 2027 onwards. It was said that investments would also be severely inhibited in Germany. The Greens in the European Parliament are also very critical of the reform. It does not meet the needs of the time, said MEP Henrike Hahn.

Federal Finance Minister Christian Lindner, however, is satisfied. Germany’s central concern – “financial stability” – is reflected in the legal texts, the FDP politician recently said. “We get clear rules for debt reduction, which can then be enforced with a realistic perspective.” The Christian Democratic EPP group in the European Parliament also spoke out in favor of the reform. The new set of rules creates more clarity and puts the economic and monetary union on a solid foundation, said economic policy spokesman and CSU MP Markus Ferber.

How it goes on

Once confirmed by EU countries, the new rules still need to be published in the EU Official Journal in order for them to come into force. This is expected to happen at the beginning of May. The deficit procedures should be able to be reopened from this spring – in all likelihood the new rules will already apply by then. According to the latest data from the EU statistics office Eurostat, several countries broke the upper limits last year.

Source: Stern

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