The Diplomat
Countries that exceed the limits of 3% deficit or 60% of GDP in their public debt – or both – will have to present a plan to redress the situation in four years, which will include a minimum annual spending cut in their budgets of at least 0.5% of GDP, if the new budgetary control rules proposed yesterday by the European Commission are successful.
One of the countries that would have to carry out this cut would be Spain, which closed 2022 with a public debt close to 115% of GDP, and for which the forecasts do not envisage that it will fall below 100% debt in the next decade.
The Commission will send these countries an outline to frame specific plans, but it will be up to the governments of each member state to present their own medium-term fiscal adjustment plans based on a “plausible” reduction in the spending path that allows debt to be kept at “prudent” levels over a period of four years. The period may be extended to a maximum of seven years if supported by targeted reforms and investments.
For its part, the Commission will provide technical paths showing what fiscal adjustment is needed to ensure that the 3% and 60% reference value criteria are met, but it will be up to the EU-27 to endorse the structural plans submitted by each country, as well as the reform and investment commitments underpinning the extensions.
The Commission’s economic vice-president Valdis Dombrovskis told a press conference yesterday that this approach is a “balanced approach designed around key areas to ensure transparency and equal treatment” and that it “allows us to reduce debt while encouraging investment and reforms”.
“Our proposals simplify our rules and focus on fiscal challenges. This means taking into account the different initial budgetary situations of the Member States and their different challenges in terms of public debt”, explained the European Commissioner for the Economy, Paolo Gentiloni, who stressed that, by focusing on spending, “the typical pro-cyclical bias that fiscal policy has had in recent years” is also avoided.
The proposal also maintains some of the obligations of the current discipline, such as the Excessive Deficit Procedure (EDP), which remains at a maximum of 3%, while that based on debt, which is activated when a member state reaches a debt of more than 60% of GDP, will be strengthened.
The revision also introduces a specific escape clause for member states to cover the possibility of extraordinary events, such as pandemics or wars, arising from the post-pandemic context and the crisis triggered by Russia’s attack on Ukraine.
However, while the proposals give Member States greater control over the design of their medium-term plans, they also provide for a stricter implementation regime to ensure that they meet the commitments they make in their medium-term plans.
For Member States facing significant public debt challenges, deviations from the agreed fiscal adjustment path will by default lead to the opening of an Excessive Deficit Procedure.
If reform and investment commitments justifying an extension of the fiscal adjustment period are not met, the adjustment period could be extended, but failure to meet reform and investment commitments justifying an extension of the fiscal adjustment period could lead to a shortening of the adjustment period.
Brussels’ objective is to conclude legislative work this year to allow preparations to begin in the course of 2024, with the development of national debt reduction plans to cover the period from 2025 onwards.
