The update is needed as the fiscal rules governed by the EU Stability and Growth Pact have come back in full force as of the start of 2024. The changes will soften the impact that stricter budgetary requirements might have on EU countries.
Fiscal rules and the euro
The introduction of the euro as a common currency around the turn of the century led to the need for harmonisation of how EU countries manage their debts and budget deficits. Debts and deficits should not get too high or the euro might get in trouble.
This is why the EU Stability and Growth Pact was created. The European Commission was empowered to oversee the coordination of fiscal policies and make sure all countries pursue sound public finances.
How the Covid-19 pandemic changed things
In early 2020, Europe was struck by the Covid-19 pandemic. It soon became clear that to save European economies from ruin, large investments would have to be made. This would be impossible within the strict limits that the Stability and Growth Pact imposes in normal times.
As a result, the EU activated a clause within the pact, called the general escape clause. This clause can be applied when the euro zone, or the EU as a whole, faces a severe economic downturn. It loosens the budget requirements on EU countries, so that they can run higher deficits and support their economies in order to overcome the crisis.
Restoring the pact
With the end of the pandemic, the general escape clause was de-activated at the end of 2023, and the pact started functioning as before . However, this made it more difficult for many countries that have a high debt to pay off. If they were to focus on their debt, it could lead to fewer investments and increase the risk of an economic downturn.
Changes to the Growth and Stability Pact
In April 2024, Parliament approved the changes to the pact that had been agreed with the Council. These changes are intended to make the rules simpler and more flexible and give EU countries more control. MEPs wanted to make sure that countries are both fiscally prudent and able to invest.
How the revised Pact will work
The new rules can be summed up as follows:
- All EU countries must write medium-term investment and expenditure plans
- Countries with a high debt or excessive spending will receive EU guidance prior to putting their plans into action
- EU guidance will be tailored to each country – no one size fits all approach.
- There will be particular restraints on countries with excessive debt: they have to reduce their debt by 1% per year if their debt is above 90% of the gross domestic product and by 0.5% per year if the debt is between 60% and 90%
- Deficits will also have to be reduced if they go beyond 3% of the gross domestic product: during periods of growth, the deficit must go down to 1.5% of the gross domestic product so that there is a spending buffer for difficult economic conditions
- Countries with a high debt or deficits will still have leeway when spending on public projects and social concerns.
The Council has also signed off on the new rules. EU countries will have to submit their first national plans by 20 September 2024.