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. Parliament and Council are working on changes in order to 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 makes it more difficult for many countries that now 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.
Parliament’s position
In December 2023 Parliament’s economic and monetary affairs committee voted in favour of making adjustments to the pact. The changes are intended to make the rules more flexible and give EU countries more control.
Changes include:
- New numerical values will define the required pace of reduction of excessive debt and the deviation limits from expenditure plans, to allow room for investment
- An extra 10-year period for completing excessive debt reduction
- New provisions will allow more investments and to increase national ownership of plans
In January 2024, Parliament members voted in favour of the committee’s position. This meant it could start negotiations with the Council on the final shape of the rules.
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