The European Council approves reform of financial rules
Brussels, April 29 / WAM / The European Council adopted three pieces of legislation that will reform the European Union’s economic and financial governance framework.
The main objective of the reform is to ensure sound and sustainable public finances, while promoting sustainable and inclusive growth in all member states through reforms and investment.
The overall goal of the reform is to reduce debt and deficit ratios in a gradual, realistic, sustainable and growth-friendly manner, while protecting reforms and investments in strategic areas such as digital, green or defence. At the same time, the new framework will provide adequate scope for countercyclical policies and help address existing macroeconomic imbalances.
Under the new rules, all member states will be required to prepare a medium-term national financial structural plan extending over 4-5 years, depending on the length of the national legislature. Member States commit in their plans to a multi-year net public expenditure pathway and explain how they will deliver investments and reforms that respond to the key challenges identified in the context of the European Semester, in particular in the country-specific recommendations.
Before that, the Commission will provide a “reference path” of net spending developments to Member States where government debt exceeds 60% of GDP or where the government deficit exceeds 3% of GDP.
The Reference Path takes into account each country’s specific sustainability challenges and indicates how Member States can ensure that by the end of the four-year fiscal adjustment period, government debt is placed or remains on a reasonable downward path or remains at prudent levels over the medium term.
The new rules contain two guarantees that the reference path must comply with:
Ensuring debt sustainability, to ensure a minimum reduction in public debt levels; And ensuring resilience in the face of deficits, to provide a margin of safety less than the treaty’s general deficit reference value of 3% of GDP, in order to create margins of safety in public finances. Member States will integrate a net spending pathway into their medium-term national fiscal structural plans.
The European Council will have to approve national plans, including net spending paths. The control account will record deviations from country-specific net expenditure trajectories.
The new rules will encourage structural reforms and public investments that promote sustainability and growth. Member States will be allowed to request an extension of the plan for a maximum period of seven years, if they commit to a package of reforms and investments that improve resilience and growth potential, support fiscal sustainability and address common EU priorities.
This includes achieving a just, green and digital transition, ensuring energy security, enhancing social and economic resilience and, where necessary, building defense capabilities.
The reform modernizes excessive deficit procedures. While the deficit-based excess deficit procedure is unchanged, the debt-based excess deficit procedure takes into account the operation of the new multi-annual framework. In order to initiate an excessive debt-based deficit measure, the Committee will prepare a report when:
The ratio of government debt to GDP exceeds the reference value
The budget position is not close to balance or in surplus
The deviations recorded in the member state’s supervisory account either exceed 0.3 percentage points of GDP annually, or 0.6 percentage points of GDP cumulatively.
In line with previous practice, the European Council and the Commission will undertake a comprehensive and balanced assessment of all relevant factors affecting the assessment of compliance with the deficit and/or debt criteria of the Member State concerned.
These factors include, inter alia, the degree of public debt challenges, the magnitude of the deviation, developments in the economic situation over the medium term, progress in implementing reforms and investments and, where appropriate, increased government spending on defence.
When the excessive deficit procedure is opened on the basis of the deficit criterion, the path of net corrective spending must be consistent with a minimum annual structural adjustment of at least 0.5% of GDP.
Temporarily, in 2025, 2026 and 2027 the Commission may take into account the increase in interest payments when determining the corrective path proposed under the excessive deficit measure.
The fine in case of non-compliance will amount to 0.05% of GDP and accumulate every six months until effective action is taken by the Member State concerned.
The new rules also better define the operation of general and country-specific exclusion clauses.
The three texts will be published in the Official Journal of the European Union tomorrow, April 30, and will enter into force on the day of their publication.
Economic management is a fundamental pillar of the structure of the Economic and Monetary Union and, since 1992, aims to prevent and correct macroeconomic imbalances that could weaken national economies and affect other EU countries through cross-border spillovers.
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