European Union enacts ambitious fiscal reform package

The European Council has adopted a trio of legislative measures aimed at overhauling the economic and fiscal governance structure of the European Union (EU). The primary objective of these reforms is to ensure the stability and sustainability of public finances across all member states, while concurrently fostering growth that is both sustainable and inclusive through targeted investments and reforms.

EU implements comprehensive overhaul of economic rulebook

This comprehensive set of new regulations represents a significant enhancement of the existing framework, establishing clear and enforceable guidelines applicable to all EU nations. The reforms are designed to uphold balanced and sustainable public finances, with a heightened emphasis on structural reforms and investments to stimulate growth and employment opportunities throughout the EU.

Vincent Van Peteghem, Belgium’s Deputy Prime Minister and Minister of Finance, underscored that the overarching goal of the reforms is to methodically and realistically reduce debt levels and deficits while safeguarding critical investments in key sectors such as digitalization, environmental sustainability, and defense. Additionally, the revised framework aims to allow for counter-cyclical policies while addressing prevailing macroeconomic imbalances.

Under the newly adopted rules, each member state will be required to draft a national medium-term fiscal structural plan spanning 4-5 years, contingent upon the duration of their respective legislative terms. These plans will outline a multi-year trajectory for public expenditure and detail how each country intends to implement reforms and investments aligned with the priorities identified in the European Semester, particularly in response to country-specific recommendations.

To facilitate this process, the European Commission will furnish member states with a ‘reference trajectory’ for net expenditure developments, tailored to address each country’s unique sustainability challenges. This trajectory will guide member states in ensuring that their government debt is either decreasing or maintained at prudent levels over the medium term.

Furthermore, the reforms include provisions for two safeguards: a debt sustainability safeguard aimed at achieving a minimum reduction in public debt levels, and a deficit resilience safeguard to maintain a safety margin below the 3 percent of GDP threshold stipulated in the Treaty on Stability, Coordination, and Governance.

Additionally, the reforms introduce measures to incentivize structural reforms and public investments conducive to sustainability and growth. Member states may request an extension of their fiscal plans for up to seven years, provided they commit to a defined set of reforms and investments that bolster resilience, enhance growth potential, and address EU-wide priorities.

Moreover, the reforms revamp the excessive deficit procedure, incorporating a debt-based approach alongside the existing deficit-based criteria. The Commission will trigger a debt-based excessive deficit procedure when a member state’s government debt exceeds the reference value, and the budgetary position is not in close balance or surplus, with deviations exceeding specified thresholds.

To ensure compliance, member states failing to adhere to the prescribed corrective measures may face fines of up to 0.05 percent of GDP, accruing every six months until remedial action is taken. Furthermore, the reforms clarify the operation of general and country-specific escape clauses, providing a more precise framework for exceptional circumstances.