New EU fiscal reforms will impede critical investments, experts warn

The much-delayed reform of the EU’s fiscal rules agreed between the European Parliament and Council over the weekend will hamper the bloc’s ability to make critical investments in green technology and Europe’s defence industry, experts interviewed by Euractiv said.

While the amended regulations introduce more nuanced targets for fiscal adjustments compared to the original Stability and Growth Pact (SGP)’s provisions, they still hinge on debt reduction timeframes that may prove problematically short-sighted, two senior policy advisors warned.  

Sebastian Mang, a senior policy officer at UK-based think tank New Economics Foundation, criticised the agreement for “focusing on debt reduction through debt reduction” rather than via growth and investment, as originally envisaged by the European Commission.

“[The new rules] are economically short-sighted because we can’t advance towards our objectives,” he said. “We can’t mitigate against climate change sufficiently. We can’t invest sufficiently. We can’t invest towards political concerns like defence and industrial policy and economic autonomy. And that’s going to make for a weaker Europe.”

The bloc’s final fiscal rules, first proposed by the European Commission in April 2023, were approved by co-legislators in the early hours of Saturday.

They keep the SGP’s original thresholds for deficit and debt at 3% and 60% of annual GDP respectively, but loosen its requirement to cut national excess debt-to-GDP ratios by 1/20th each year.

EU reaches agreement on spending rules

The European Parliament and member states reached an agreement early Saturday (10 February) on reforms to EU budgetary rules aimed at boosting investment while keeping spending under control.

Member states that are found to contravene the agreed limits will now have to follow individually tailored ‘reference trajectories’ – or plans – set by the European Commission, detailing how they can approach fiscal compliance over a four-year (or, on some occasions, a seven-year) period.

However, any such tailored plan will still require member states with public debt-to-annual GDP ratios above 90% to reduce their debt burden by one percentage point annually on average, and EU countries with debt levels between 60% and 90% of annual GDP must cut their debt ratios by 0.5 percentage points on average per year. 

In addition, all member states will be asked to keep their deficit levels below 1.5% of annual GDP, thereby providing a ‘fiscal buffer’ beneath the official 3% limit.

The original fiscal rules were suspended in 2020 to allow for high deficit spending during the COVID-19 pandemic. The suspension was later extended to 2024 following the energy crisis triggered by Russia’s full-scale invasion of Ukraine in February 2022.

‘Not enough fiscal space’

Philipp Lausberg, an analyst at the European Policy Centre (EPC), agreed with Mang’s assessment that the new rules, although perhaps less stringent than before, are not lenient enough to allow for the kind of deficit spending required to ensure Europe’s economic competitiveness.

He also criticised Germany – whose finance minister, Christian Lindner, is a renowned budget hawk – for lobbying to modify the Commission’s original proposal to include mandatory fiscal benchmarks.

“I think the initial Commission proposal would have been quite good in creating additional investments,” he said. “But I think that, by including these still quite strict numerical benchmarks [under pressure from] Germany, the rules don’t provide the fiscal space necessary for the transitions that we need to undergo.”

Some consolidation necessary?

Conversely, Cinzia Alcidi, a senior research fellow at the Centre for European Policy Studies (CEPS), emphasised that, with so many member states running high levels of debt and surging fiscal deficits, “some form of fiscal consolidation will have to happen”.

According to the Commission’s latest forecasts, 13 of the EU’s 27 member states are expected to have debt-to-annual GDP ratios above 60% in 2025.

Of these countries, six are projected to have debt-to-annual GDP ratios above 90%, including France, Italy, and Spain – the EU’s second, third, and fourth-largest economies respectively. Thirteen member states are also expected to run deficits above 3% of annual GDP next year, again including France, Italy, and Spain.

However, Alcidi also warned that some member states – including the three aforementioned countries – will likely have to make “substantial adjustments [and] trade-offs” to comply with the rules in the near term, which would indeed entail reductions in investments.

“I think that the safeguards are going to bite for several member states,” she said. “And so for those countries, it would probably limit their ability, at least in the short term, to make certain kinds of investments unless they fiscally consolidate in other areas quite rapidly.”

Zsolt Darvas, a senior fellow at think tank Bruegel, agreed with Alcidi that some form of fiscal adjustment by member states is “inevitable”.

Nevertheless, and despite expressing some sympathy for the “fiscally hawkish” view that “every country has lots of wasteful fiscal spending”, Darvas noted that in most cases identifying these spending items would likely require a multi-year spending review – time which member states simply don’t have.

“The urgency of spending on defence and in particular on the green transition is [such that] it can’t wait for several years until spending identifies which kind of public spending can be cut,” he said.

Workers’ groups amplify warnings

Experts’ opinions were also largely echoed – albeit more vociferously – by labour associations.

Esther Lynch, the General Secretary of the European Trade Union Confederation, which represents some 45 million European workers, told Euractiv that the new rules “risk unleashing a new round of deeply damaging austerity” that will “impact the lives of millions of working people”.

“It fails to guarantee that governments can make the investments needed to address the challenges of our time,” she said. “Europe needs investment to create quality jobs and to ensure just green and digital transitions.”

Lynch also urged member states to be more transparent about how they ultimately aim to achieve fiscal compliance.

“Governments must make their plans to deal with the new rules public,” she said. “We need to know if there will be cuts to spending, investments rendered impossible, or increased taxes (and for whom). Workers and the most vulnerable must not be asked, once again, to pay the price.”

[Edited by Anna Brunetti, Nathalie Weatherald]

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