After almost four years in which the budgetary discipline of European stability rules was suspended, the Twenty-Seven managed to unanimously sign an agreement this Wednesday to reform the fiscal rules of the European Union. The (virtual) meeting of EU Economy and Finance Ministers (Ecofin) this Wednesday supported the reform proposal put on the table The current Spanish Presidency of the EUAfter France and Germany managed to resolve their differences meeting in paris Tuesday night. “This is a great deal that comes at the right time,” the first vice president said. Nadia Calvino, From January 1, 2024, the escape provision that allowed the old fiscal rules to remain suspended will be deactivated. The new rules will be fully implemented in the 2025 Budgets. 2024 Accounts are recommended as a transition to this new model.
1. Why new rules?
European institutions started the discussion on drafting new rules at the beginning of 2020, before the start of the pandemic. covid health crisis. The 2008 financial crisis and the subsequent euro debt crisis (which started in 2010) demonstrated the ineffectiveness of the rules defined since 1992 in achieving the target of a budget deficit below 3% of GDP and a debt below 60% of GDP. had revealed. member states. The rules turned out to be complex, opaque, difficult to follow, and cyclical: when countries performed poorly, the rules got worse (as seen in the Greek crisis) and vice versa. Sanction system, fines This rate, which could have reached 0.5% of GDP, was never implemented despite apparent non-compliance by many. Germany and Francelater like Southern countries (Greece, Italy, Spain, Portugal or Ireland). The current reform aims to achieve a gradual and sustained reduction in public debt, consistent with economic growth and investment.
2. Are the references to 3% and 60% of GDP maintained?
Yes, the new rules will maintain the target of the public deficit below 3% of GDP and the debt below 60% of GDP, set in the Maastricht Treaty (1992). What changes would be made to the rules to achieve these goals? Again, a new budget deficit target of 1.5% of GDP has now been set This allows states to respond to moments of budget challenges without violating the 3 percent of GDP limit. This protection was put into practice under pressure from Germany.
3. What are the main changes?
The main changes are two: stabilization pathways will be individualized for each country and they will be defined by annual spending ceilings (not by interim deficit targets)
In the new system, countries More than 60% debt The GDP (Spain closed 2022 with a 113% rate) needs to devise an adaptation plan in agreement with the European institutions. 4 years, extendable up to 7 years if certain investment and reform commitments are undertaken. Right now, convergence plans It covers three years.
Additionally, the settings will be defined from: spending ceiling (a given annual percentage change) net primary expenditure, without taking into account interest on public debt or cyclical expenditure on unemployment). So far, when a country exceeds the debt level of 60% of GDP, the so-called rule ‘part twenty’: The difference between the debt level and 60 percent must be eliminated by one twentieth of the difference every year, within 20 years at most.
With 2022 data, there are 13 countries in the European Union with debt levels above 60 percent of GDP, and Spain is one of them. Spain closed 2022 with debt of 111.6% of GDP. Greece, Italy, Portugal and France. The government projects a rate of 108.1% of GDP in 2023.
4. How will countries settle their accounts?
Every country must agree with European institutions four-year adjustment plan for non-interest expenses It guarantees two issues (for the period 2025-2028). First: open It is (or will remain) below 3% of GDP. Second: Correction of the public debt, which should remain unpaid even if new regulations are not made for 10 years following the plan period (until 2038). 4-year period can be extended Seven If the plan assumes certain commitments investment and reforms.
5. How will it affect Spain?
Spain is at the center of new fiscal rules because the European Union’s debt level is just Exceeds 60% of GDPbut also 90%. It is also one of the countries with a high budget deficit.
Due to its high level of debt, Spain is one of the countries that has to present a four-year (seven-year if certain investment commitments are undertaken) adaptation plan that guarantees the reduction of this debt.
The Independent Authority for Accountability (Airef) has made some estimated calculations for Spain. According to them, to meet the requirements of the new rules, Spain needs to plan an adjustment of around 0.64 percentage points per year (equivalent to around 8.6 billion per year) to reach a deficit of 2% of GDP in the period 2025-2028. GDP in 2026 and 0.8% in 2028 (adjusting for four years would add 34.4 billion in total).
In any case, the Twenty-Seven Agreement ensures that countries with public debt greater than 90% GDP needs to guarantee effective reduction of 1 percentage point per year on average For countries where the debt ratio is between 60% and 90%, this is the case of Spain (the minimum debt adjustment would be 0.5% of GDP).
Additionally, countries that have budget deficit more than 3% of GDP one should undertake Annual minimum adjustment of 0.5% of GDP. Spain hopes to escape this obligation and to do so has set a deficit target of 3% of GDP in 2024; The Bank of Spain does not see this as possible in its forecasts, at least for now. In the case of Spain, an annual adjustment of 0.5% of GDP would be equivalent to approximately $6.7 billion.
in spain, public deficit It amounted to 4.8% of GDP in 2022. The latest Government forecasts predict a deficit of 3.9% in 2023; 3% in 2024; 2.7% in 2025 and 2.5% in 2026.
6. Will the sanctions regime be maintained?
The reform proposed by Brussels Excessive Deficit Procedureor (PDE) and includes an enforcement scheme, but this will differ from the current one. Will be Economic sanctionsbut not as high as in the current model, so that they can become effective and applicable. The Commission maintains the cap threshold of 0.5% of GDP, although it has introduced a new six-month sanctions system with cumulative fines to ensure a more “realistic” application given that the current system has never been implemented. If a country deviates from the fiscal alignment path agreed with the EU, the initial penalty will be 0.05% of GDP. This amount will increase every six months and will be paid every six months until the Member State concerned takes effective corrective measures. In any case, the accumulated fine, 0.5% limit, the threshold prescribed in the current rules. will also reputation sanctions, for example, when heads of government appear before the European Parliament. The sanctions will come into effect if countries move away from the four- or seven-year alignment path agreed with the European Commission.
7. When will the new model come into force?
Once the Twenty-Seven political agreement has been reached, discussions on the text should begin in so-called ‘tripartite’ sessions attended by the three institutions of the European Union (the EU Council, the European Parliament and the European Commission).
The revised agreement will need to be formally adopted by the Parliament and the Council before it is published in the Official Journal of the EU, and It will come into force in 20204, with its effects
For now, 2024 is considered a transition year: The new rules will not come into force yet, but the European Commission has asked Member States to prepare their 2024 Budgets as close as possible to them, with the necessary adjustments. Additionally, the exam will be rescheduled for the spring of 2024. Excessive Deficit Procedure (PDE) will examine the accounts suspended from 2020 (with the covid crisis) and 2023 accounts.
8. Do all countries agree?
Yes, the agreement was unanimous among the Twenty-Seven. At the beginning of the debate, Spain and the Netherlands led the way in advocating greater flexibility in stabilization rules. France. Germany pressed to ensure that this greater flexibility did not translate into a looser schedule and encouraged the inclusion of clear numerical references that allowed for strict scrutiny of compliance. Therefore, considerations such as the requirement for an annual minimum adjustment of 0.5% of GDP for countries with a budget deficit of more than 3% of GDP are included.