28th Mar 2023

EU proposes temporary fix to debt and deficit rules

  • EU economy commissioner Paolo Gentiloni stressed the need for new rules that are fit for purpose (Photo: European Commission)
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Member states will be permitted more leeway in reducing public debt, the European Commission announced on Wednesday (8 March).

But trade commissioner Valdis Dombrovskis told press that with energy prices in retreat, the time for "broad-based fiscal stimulus has passed."

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"The EU economy has recovered beyond its pre-pandemic level. It is time to shift gears, and our emphasis should turn to improve debt sustainability," he said.

Existing EU fiscal rules limited public deficits to three percent, and debt to 60 percent, of GDP — but were suspended in 2020 because the rules were deemed unfit for purpose. The so-called 1/20 rule, which obligated high-debt countries to reduce debt levels by five percent each year, was considered especially unfeasible.

Dombrovskis confirmed the rules would come back into force in their current state if member states do not agree to new regulations before the end of the year.

The commission will not sanction countries in breach of the existing three-percent deficit rule this year, but they will be imposed from April next year onwards.

EU economy commissioner Paolo Gentiloni stressed that new rules should be agreed upon sooner rather than later: "It would not make sense to revert to old rules as if nothing had happened ."

Temporary fix

Even if the economic circumstances in Europe are less dire than some expected only a few months ago, the EU is still faced with challenges that will require it to keep investing.

For example, European countries are boosting investments in clean tech to compete with the €342bn green subsidies under the US Inflation Reduction Act. And Gentiloni emphasised member states should "keep protecting" public investments already planned.

Acting as a potential impediment to spending was this uncertainty over the rules. It was unclear whether the old rules would come back into force and whether sanctions would be imposed this year.

Wednesday's commission guidance is a temporary fix for this. And it also serves as a vantage point for negotiations between member states due to take place at the next EU summit of leaders in March.

Member states will also be asked to adapt their three-year budgetary plans to the new guidance due at the end of April and should include "credible" debt reduction plans, trade commissioner Valdis Dombrovskis told press.

But it is still unclear what should replace the five-percent debt reduction rule, and how much individual flexibility should be granted to member states. There is also no agreement on whether, and how strictly, transgressions should be sanctioned.

The commission will make formal proposals in March following a meeting of EU finance ministers next week.

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