Commission proposes more individual debt rules for EU countries

The European Commission presented its proposals to reform the debt and spending rules for national governments on Wednesday (9 November) as individual plans for every EU country, negotiated between national governments and the Commission.

The EU fiscal rules, which dictate how much leeway national governments have in public spending, have come under fire in recent years. While some critics describe them as ineffective due to a lack of enforcement, others find that they restrict member states too much, especially regarding investments in the green and digital transition.

The Commission has now come up with a proposal that aims at addressing both concerns by giving member states more flexibility in how they choose to reduce their public debt in line with the targets set out in the EU treaties, while at the same time strengthening enforcement of the agreed pathways.

“Above all, we aim to ensure public debt sustainability. This will require fiscal adjustment as well as growth-enhancing reforms and investments,” said Valdis Dombrovskis, vice president of the European Commission in charge of economic affairs, at a press conference.

At the centre of the proposal is the idea to introduce country-specific plans, which would be negotiated individually between each national government and the European Commission.

Those will include a pathway on “net primary expenditure,” meaning public spending without interest payments or cyclical unemployment benefits, but taking into account discretionary tax increases in the case a government decides to fund additional expenditures by increasing taxes.

“In effect, countries will own their plans by being directly involved in the design, and that’s a real departure from today’s situation,” Dombrovskis said. Member states should thereby combine efforts to reduce debt levels with investments to enhance economic growth, depending on the national circumstances, he explained.

Looming reform of EU debt and deficit rules: A look at current rules

With the European Commission expected to put forward its ideas for the reform of the much-criticised fiscal rules for EU member states on Wednesday (9 November), EURACTIV takes a look at the current rules and explains why they are criticised.

Scrapping the 1/20 rule

While the Commission does not want to change the main objectives for public finances enshrined in EU law, it wants to scrap one of the rules that determines how the objectives should be achieved, which has become unrealistic due to huge overshoots in overall public debt.

As in the past, member states should aim to achieve a debt level of no more than 60% of GDP and a yearly deficit of no more than 3% of GDP.

The rule that asked member states above the 60% threshold to reduce their public debt by 1/20 of the difference to the target every year, would, however, be given up in favour of the new individual plans, according to the Commission’s communication. 

“It’s not a question of whether to put debt onto the reduction path towards 60% of GDP. It’s more of a question of how each country gets there, and especially how fast member States would set out their path in a more realistic way than the current 1/20 rule would require,” Dombrovskis said. 

The proposal thereby establishes three categories of countries, crucially depending on their debt-to-GDP ratio, but also taking other factors into account, such as how the public debt is expected to develop over the next 10 years.

The plans will be negotiated for a period of four years. While highly indebted countries would need to show that they can start reducing their public debt from the end of the four-year period onwards, countries in the medium category have three years longer to reach such a pathway.

Member states also need to show that they can stay on a pathway of continuously reducing debt levels within a timeframe of 10 years, but there is no general date as to when they need to reach the 60% target.

“Countries with substantial public debt challenges would still need to reduce their debt faster than those with less pressing concerns,” Dombrovskis said. However, member states can ask for an extension and a “more gradual adjustment path” than the one proposed by the Commission.

“This would be in exchange for additional structural reforms and investments to boost fiscal sustainability and sustainable growth,” and conditional on the approval by the European Commission and the Council of EU member states, Dombrovskis explained.

Stronger enforcement of rules

“Once agreed, each member state must comply with its plan for its entire period. This means full implementation,” he said, pointing out that the enforcement of rules will be strengthened by additional measures.

“If we see that the country does not live up to its commitments, we would be able to request a revised plan with more stringent fiscal paths and impose financial sanctions too,” he added. 

The Commission will thereby make use of lower penalties than in the past, which should make it more realistic for the Commission to actually impose them. High financial penalties have the disadvantage of further worsening the financial situation of the member states upon which they are used. 

“If these penalties are more applicable, they can be more lenient. It’s a bit like moving from nuclear weapons to conventional weapons,” said Economy Commissioner Paolo Gentiloni during the press conference. He said he also hopes for member states to be more willing to implement the debt reduction pathway as agreed, due to their “greater ownership”.

After presenting its plans to revise the rules, the Commission will now discuss its ideas with member states and aims to make a legislative proposal by the first quarter of next year, Gentiloni said.

[Edited by János Allenbach-Ammann]

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