The Twenty-Seven agree to a reform of fiscal rules with demanding adjustments for non-compliant parties

The EU Economy and Finance Ministers reached an agreement this Wednesday to close a political agreement that will establish new European fiscal rules. A key pact for the Twenty-seven since it establishes the new legal framework with which the States with the most debt and deficit will have to adjust their budgets after four years without community fiscal discipline. The agreement includes demanding adjustment obligations for countries that, as is the case of Spain, exceed the maximum debt and deficit limits.

This was announced this afternoon by the first vice president of the Government of Spain and Minister of Economy, Nadia Calviño, and the economic vice president of the European Commission, Valdis Dombrosvkis, after an informal meeting of the Ecofin to finish polishing the last technical details.

Calviño has welcomed a “unanimous” agreement that “guarantees” a sustained and gradual reduction in debt and deficit, and at the same time leaves room to protect public investment in priority issues for the EU such as the green and digital transition, defense or social spending. The vice president added that the new framework is more “realistic” and responds “to the post-pandemic reality”, in which EU countries have accumulated a debt that exceeded 83.5% of GDP last year and a deficit of 3.2%.

The new European fiscal framework has been designed with the idea of making it simpler and more personalized, but maintaining the maximum permitted limits of debt (60% of GDP) and deficit (3% of GDP). Two references that have often been criticized for their arbitrariness. Member States that exceed these levels will have to undertake adjustments to balance the accounts. However, unlike previous legislation, this time the specific situation of each country will be taken into account to design the adjustment path.

Governments will have the initiative and present personalized multi-year plans, which must be negotiated with the European Commission and approved by the Council.. Before, it was Brussels that imposed the adjustment agenda. The structural plans to reduce the debt will have a term of four years, extendable to seven if the member countries incorporate reforms and investments.

However, the speed of budget adjustment – which can be carried out by cutting spending or increasing income – will be quite demanding for countries with more debt and deficits.. Those with liabilities of more than 90% of GDP will be obliged to reduce them at a rate of 1% per year, a speed that relaxes to 0.5% for countries with a debt between 60 and 90%.

But the toughest demands will be applied to deficit reduction. Countries that fail to meet the two maximum thresholds must present a plan with an adjustment equivalent to 0.4% of GDP per year (about 5.4 billion euros in 2022), which may be reduced to 0.25% if it is expanded. the four to seven year plan. Those who exceed 3% of the deficit and enter the corrective arm must apply an adjustment of 0.5% (equivalent to about 6.7 billion).

But in addition, countries that have a deficit below 3% of GDP will have to maintain a structural deficit – which remains after discounting the effects of the economic cycle – of 1.5%.. A requirement that did not exist before and that is designed for countries to generate a cushion in good times to use in times of crisis.

So that the impact of these adjustments is not immediate and hits just at a time when interest rates are going to considerably increase the costs of debt, the Twenty-seven have agreed on a transitional regime until 2027.. Between 2025 and 2027, States that find themselves in this situation will be able to deduct the cost of debt interest from the adjustment, which in practice will limit the size of the adjustment.

Key file in the Spanish presidency

The reform of fiscal rules is probably the most important file that has been negotiated during the Spanish presidency of the Council of the EU, which will conclude on December 31. After receiving the approval of the Twenty-Seven, the text must receive the approval of the European Parliament in order to enter into force in the first quarter of 2024.

The update of the Stability and Growth Pact, the name of the legislation on fiscal rules, has been under discussion since 2021. The first communication about its reform came from the European Commission in December of last year. Afterwards, it would go through the European Council, which presented its recommendations last March. The negotiations were delayed by the disagreement between the countries in favor of stricter fiscal objectives – led by Germany – and the States with a more delicate fiscal situation – led by France – which asked to combine fiscal discipline with room for public investment.. In December, talks intensified and an agreement was finally reached that was signed unanimously by all parties.