24th Sep 2023

EU agrees to cut spending for 2024, despite investment needs

  • Paschal Donohoe, president of the Eurogroup (Photo: EU Commission)
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EU finance ministers meeting in Brussels on Thursday (14 July) agreed to slash government spending for 2024 to "reduce deficits and debt ratios over time."

"We will achieve the necessary overall restrictive fiscal stance in the euro area for 2024 by implementing the fiscal recommendations by all euro area member states," said Eurogroup chief Paschal Donohoe in a statement late Thursday.

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Public spending over the period 2020 and 2022 was expansionary to deal with Covid-19 and the Russian war in Ukraine, which according to Eurogroup, had placed an "additional burden on public finances."

Most notable among those costs were increased energy prices. Mitigating the fallout of the energy crisis has cost European countries €792bn between September 2021 and January 2023, the financial think-tank Bruegel reported earlier this year.

This money helped prevent a recession. "Growth was better than expected," the Eurogroup concluded.

Although debt levels are already falling in the EU, the increased cost of borrowing due to the European Central Bank's (ECB) rate hikes will start eating into public spending.

Fiscal consolidation will be guided country-by-country, meaning some, like Italy and Portugal, will likely face more fiscal constraints in the coming years than wealthy Nordic countries, the Netherlands and Germany.

The exact course of the spending cuts will be determined based on new fiscal rules, which are meant to limit EU spending. But these are still hotly debated, with German finance minister Christian Lindner strongly pushing for stricter rules while the French leadership wants more leeway.

Some initial calculations based on the last EU Commission proposal made by the German think-tank Dezernat Zukunft project Italy and Portugal would have to run three percent structural primary surpluses by 2028 implying major public spending cuts.

In April, the International Monetary Fund found [see Chapter 3] no evidence proving that fiscal consolidation reduces debt-to-GDP ratios and also noted that during an economic downturn, it could increase debt rather than reduce it.

There are cases in Europe where this can be seen. According to the EU's annual macro-economic database (AMECO) for example, Italy's GDP has not grown since 2000 in real terms, while that of the eurozone has increased by 25 percent. It has run primary surpluses for 30 years, but this has failed to reduce debt which increased during this time.

Political economist Max Krahé in a report published earlier this year, found that underinvestment was at the root of Italy's stagnation.

"Any credible reform package must tackle the deep roots of Italy's stagnation without repeating the investment-suppressing mistakes of the last 30 years," he wrote.

Although final fiscal rules are uncertain and eventual budget cuts will likely be subject to negotiation between the commission and individual member states, Thursday's announcement points to a general tightening of the purse in Europe.

As noted in the Eurogroup press release, "EU ministers agreed to prioritise safeguarding and increasing investment" through the EU's €800bn pandemic fund, which is still being dispersed.

However, according to the commissions' strategic foresight report published last week, Europe needs green investments worth €712bn a year until 2030 to meet climate goals.

To meet this, the Eurogroup called for increased private investments, but the European Court of Auditors reported in June "there was no sign" sufficient private climate finance would be made available to reach 2030 targets. The Eurogroup did not offer further details on how to increase investment in the context of fiscal consolidation.

"Italy running a three percent surplus during the transition? Good luck," Philippa Sigl-Glöckner, director of Dezernat Zukunft, told EUobserver.

EU finance ministers will again discuss fiscal strategy in December when draft budget plans are ready.

Looser EU fiscal rules agreed, with 'country-specific' flexibility

EU finance ministers agreed on new spending rules, copying much of previously existing rules. One worry is that only three countries — Sweden, Denmark and Luxembourg — could currently afford to meet green commitments while meeting debt and deficit rules.

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