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EU finance ministers have bowed to German pressure for tough debt-reduction rules, as part of a deal to phase in a sweeping overhaul of the union’s budget framework.
After months of haggling, the package gives EU member states greater independence on agreeing debt and deficit plans with Brussels, but only within tight spending limits demanded by fiscal hawks.
Although high-debt states were given some extra wriggle room as part of a transition period, the new framework included stricter overall limits on spending that were crucial to winning over Germany, which was deeply sceptical about the original reforms.
The political deal, struck after marathon negotiations between capitals, must still be agreed with the European parliament to become law.
Sigrid Kaag, the Dutch finance minister, said the deal would ensure “ambitious and sustainable debt reduction” in Europe. “This agreement provides for fiscal rules that encourage reforms, with room for investments and tailored to the specific situation of the member state in question.”
Enforcement of the EU rules, known as the Stability and Growth Pact, had been suspended at the onset of the Covid-19 pandemic but are set to apply again from next year, adding pressure on ministers to come to an agreement.
EU countries are saddled with high debt and struggle to bring down spending after costly lockdowns and an energy crisis sparked by Russia’s full-scale invasion of Ukraine.
Eurozone debt, while declining, remains historically high at around 90 per cent of gross domestic product, and the ratio in six countries — Greece, Italy, France, Spain, Portugal and Belgium — is in excess of 100 per cent.
Ministers had decided the old rules, too strict and seldom enforced, were out of step with the new high-debt reality and needed to be reformed.
The compromise agreed between EU member states built on original proposals from the European Commission, which sought to give countries more independence in setting debt reduction plans.
Under the framework, the commission will draw up national spending plans over four years ensuring debt is put on a declining path. Countries can extend these up to seven years by committing to growth-enhancing reforms.
Two fiscal benchmarks, which are included in EU treaties, remain unchanged: a 60 per cent debt-to-GDP ratio and a 3 per cent annual deficits limit. Ministers agreed to ditch a separate requirement to cut excess debt by 5 per cent per year.
To improve enforcement, the ministers decided to introduce a yearly spending cap that will become main benchmark used to assess a country’s compliance with its fiscal plan.
These plans will be flanked by two “safeguards” added at the behest of a group of countries led by Germany, who criticised the commission’s proposals as too lax.
Countries with debt ratios above 90 per cent of GDP will be required to cut excess debt by one percentage point per year over the duration of their national spending plan. That target is halved for countries with debt ratios above 60 per cent but below 90 per cent of GDP.
There are additional budget targets placed on countries with deficits above 3 per cent and debt-to-GDP ratios above 60 per cent. These require them to aim to cut deficits to 1.5 per cent of GDP with annual curbs to spending.
Sanctions are strengthened under the deal, with countries missing spending plan targets falling into a so-called excessive deficit procedure, which would require them to reduce spending by 0.5 per cent of GDP per year.
The commission has already said that a large number of draft budget plans for 2024 do not comply with the required thresholds and will be sanctioned after EU elections.
But a last-minute concession won by France ensures that countries subject to such a procedure will be able to discount debt interest costs in the period 2025-2027, effectively reducing the required spending curbs.
“For the first time in 30 years, this stability and growth pact recognises the importance of investment,” French finance minister Bruno Le Maire said on X.
Giancarlo Giorgetti, Italy finance minister, had threatened to veto the proposals but ultimately told his colleagues he would relent “in the spirit of compromise”, according to people briefed on the discussions.
Some experts said that the reform falls short of its original objective to simplify the rules and ensure more consistent enforcement.
“The impression is that countries such as France and Italy have accepted some commitment that would not be binding on them in the short term, in the conviction that it will never be applied,” said Lucio Pench, the author of the commission’s original proposal, now a non-resident fellow with think-tank Bruegel.
The political agreement reached by ministers will now form the basis of negotiations with the European parliament, whose position on the rules is more lenient.