NAfter a long dispute, the EU finance ministers have agreed on new budget rules for the member states. As the Spanish EU Council Presidency announced after a video conference of ministers on Wednesday evening, they had agreed on a new set of rules that would ensure “equal stability and growth”. “The new rules are balanced, realistic and fit for current and future challenges,” said outgoing Spanish Economy Minister Nadia Calviño after the video conference.
This was preceded by a meeting between Federal Finance Minister Christian Lindner (FDP) and his French counterpart Bruno Le Maire on Tuesday evening in Paris, in which the two department heads resolved the last points of contention. On Wednesday, the French Finance Ministry said that both sides had “100 percent” agreement on a new compromise text. In Brussels, EU diplomats added that Italy, whose government had since announced new reservations, also agreed to the compromise.
The Franco-German consensus paved the way for the final agreement between the 27 member states. The compromise text is expected to be adopted by the EU ambassadors this week, so that negotiations with the EU Parliament on the final new regulations can begin early in the new year and be completed in time for the European elections. The “old” set of rules has been suspended since the corona pandemic.
France is only now seeing stability and growth fulfilled
Le Maire said that for the first time since the introduction of the euro, a “real stability and growth pact” would be introduced, “not just a stability pact”. Lindner said Germany had enforced “safety lines” that ensured permanent debt reduction. At the same time, the federal government is “open” to the demand that “we have to invest”. The reform is necessary because the previous pact was “only strict on paper”. Lindner had originally spoken out completely against a new regulation of the Stability Pact.
The basis for the negotiations was a proposal from the EU Commission in April, which envisages individual ways for each country to reduce debt instead of uniform guidelines. Germany and France entered the negotiations with very different positions. The compromise consists of new rules primarily for the “preventive” arm, which is intended to ensure long-term debt reduction, but it also affects the “corrective” arm, which is intended to correct excessive new debt. Additional exceptions to the current rules have been added for both arms to facilitate government investment.
In the preventive arm, the new basic principle remains that the EU Commission agrees on long-term debt reduction paths with states that are too indebted, usually four years. To ensure that the Commission is not completely free in its decisions, several quantified reference values apply, which were introduced primarily due to German pressure.
More exceptions should allow investments
The general rule is that a country with a debt ratio above the Maastricht reference value of 60 percent of gross domestic product (GDP) must reduce the ratio by one percentage point annually. Furthermore, their structural, i.e. cyclically adjusted, deficit may not exceed 1.5 percent of GDP. However, several exceptions have been added that are intended to allow states to make additional investments and state-financed “structural reforms”. They enable significant deviations from the mining paths.
Exceptions also characterize the corrective arm, which was originally not intended to be changed. Lindner emphasized that, as planned, the actual legal text of the corrective arm should not be changed. Rather, it would simply expand the existing options for flexible application of the budget rules. As before, the EU Commission should open a deficit procedure if a country becomes indebted by more than 3 percent of GDP. As before, the principle should apply that the country in question must reduce its deficit by 0.5 percentage points of GDP annually.
However, the Commission can deviate from this between 2025 and 2027. During this time, states should be able to “temporarily” claim government spending of up to 2 percent of GDP in order to enable investments in green and digital transformation, but also for defense.
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