10 November 2023

EURACTIV's Allenbach-Ammann: What we know about the new fiscal rules

EU finance ministers are optimistic that they have come closer to an agreement on fiscal rules. So what do we know about what they will look like, and what remains open for discussion?

The worshippers of fiscal restraint are getting closer to their goal.

“Like the pilgrims in the ‘Camino de Santiago’, we are starting to see the cathedral at the end of the way,” Spanish Vice-President and Finance Minister Nadia Calviño told journalists after a meeting on Thursday (09 November).

Based on the Spanish “landing zone” paper, seen by Euractiv, and based on briefings by different member state diplomats, we can discern the main building blocks of that cathedral to the god of fiscal prudence.

What we know

All member states will have to follow country-specific net expenditure paths that will be negotiated together with the Commission. This path should ensure that the 10-year debt trajectory is “on a plausibly downward path” in countries with a debt level above 60% of GDP and that debt remains at “prudent levels” for all other countries.

The net expenditure paths should be based on the Commission’s debt sustainability analysis, the methodology of which the Commission will have to publish, but they will be hemmed in by two “safeguard” provisions: a minimum annual structural primary adjustment of at least 0.5 percentage points of GDP for countries with deficits above 3%, and a minimum debt reduction for countries with debt levels above 60% of GDP.

Moreover, there will be control accounts in which the yearly deviations from the net expenditure path will be recorded and accumulated for countries with debt levels above 60% of GDP and for countries with deficits above 3% of GDP.

If the control account surpasses a certain threshold, a Commission report will be triggered, which could then lead to the opening of an Excessive Deficit Procedure (EDP), the EU fiscal rules’ corrective arm.

Also, under pressure from the German government, the compromise text says there should be a safety margin to keep deficits below the 3% of GDP threshold.

Finally, we know that investments in the green transition will not enjoy any kind of preferential treatment. There is a somewhat preferential treatment of defence spending, however, as growing defence investments will be seen as an alleviating factor when triggering an EDP, as my colleague Aurélie Pugnet and I reported earlier this week.

When finance ministers were asked ahead of the meeting about whether the compromise would allow for enough investments for the green transition, they dodged the question, talking about “creating fiscal space” instead.

What we don’t know

Much of the fiscal sustainability cathedral is still hidden by fog. As the negotiators have only debated principles and no legal texts yet, it is difficult to gauge how exactly the safeguards will work.

For one, three important numbers have not been decided yet. First, we don’t know how large the minimum debt reduction should be, we don’t know at which level the net expenditure control account will trigger a Commission report, and we don’t know how big the “safety margin” to keep deficits below the 3% thresholds will be.

Moreover, it is unclear how the minimum debt reduction safeguard will work. It is said that it is an ex-ante provision that should help design the net expenditure path and should in the end lead to lower debt levels....

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