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EU Reaches Preliminary Deal to Revise Fiscal Rules, Allowing More Flexibility

Brussels, February 10, 2024, The Europe Today: EU member states and Members of the European Parliament (MEPs) reached a preliminary agreement on Saturday to amend the bloc’s stringent fiscal rules, offering governments increased flexibility in managing debt and providing incentives for investments in climate, industrial policy, and security. This overhaul of the Stability and Growth Pact, a set of fiscal rules in place for two decades, aims to accommodate the economic challenges posed by the pandemic recovery efforts and the EU’s ambitious goals in green initiatives, industry, and defense.

Under the new rules, governments are provided with extended timelines to reduce debt, and incentives are introduced to encourage public investments in key areas such as climate change mitigation, industrial development, and security measures. While the revised rules establish minimum deficit and debt reduction targets, these are less ambitious compared to previous benchmarks.

European Commission Vice-President Valdis Dombrovskis expressed the significance of the updated rules, stating, “At a time of significant economic and geopolitical challenge, the new rules will allow us to address today’s new realities and give EU member states clarity and predictability on their fiscal policies for the years ahead.” He emphasized that these rules aim to enhance the sustainability of public finances and promote sustainable growth by incentivizing strategic investments and reforms.

MEP Margarida Marques highlighted the improved approach, stating, “With a case-by-case and medium-term approach, coupled with increased ownership, member states will be better equipped to prevent austerity policies.”

Key provisions of the revised rules include allowing countries with excessive borrowing to reduce their debt on average by 1% per year if it exceeds 90% of the gross domestic product (GDP). For countries with debt between 60% and 90% of GDP, the average annual reduction is set at 0.5%. Countries with a deficit above 3% of GDP are mandated to cut it in half to 1.5% during periods of growth, establishing a safety buffer for economic downturns.

The consideration of defense spending in assessing a country’s high deficit is a notable addition, triggered by geopolitical events such as Russia’s invasion of Ukraine.

The updated rules grant countries a seven-year period, up from four, to reduce debt and deficit starting in 2025. However, a member state with excess debt is not obligated to reduce it below 60% by the end of the seven-year period as long as it demonstrates a plausible downward trajectory.

The preliminary deal reached by negotiators from the EU Council of Ministers and the European Parliament will undergo formal endorsement by both entities before taking effect next year.