The spread of the coronavirus and the measures taken to contain it caused a sharp drop in economic activity, which led to a deterioration in public accounts due to reduced revenues and higher expenses. In response, authorities decided to suspend the fiscal rules outlined in the Stability and Growth Pact (SGP). If followed, these rules would significantly limit government room to react. The rules require keeping the overall deficit below 3 percent of GDP and bringing public debt below 60 percent of GDP. Countries exceeding these thresholds must follow Ecofin recommendations, adjusting expenditures and revenues to stay within the limits. Failing to comply could trigger additional regulations or even economic sanctions.
Although the suspension of these rules was intended to be temporary, the invasion of Ukraine by Russia threatened the fragile recovery and left little choice but to extend the pause. Reintroduction of the rules was pushed back to 2024, as monetary policy had already tightened to counter inflationary pressures. Debates about the pace of revenue collection and the possibility of new thresholds continued, with agreement hampered by the diverse situations across member states.
The attached graphs show the varied positions of EU countries. Some carry high debt-to-GDP ratios, such as Italy and Greece; others report very low levels, like the Netherlands and Denmark; and nations such as France, Spain, and Belgium sit in the middle. In the early years depicted, several countries, notably Ireland and Spain, saw rising relative debt. Later, many countries experienced a decline, while some remained relatively stable except for a few exceptions. A common feature across most charts is a spike in 2020, driven by the arithmetic effect of a contracting denominator in the debt-to-GDP ratio during the health crisis and by deteriorating public finances due to higher expenditures and lower tax collection caused by the pandemic. By 2022, some countries reduced their debt back toward 2019 levels, while others stayed above them.
The differences among economies in balancing revenue and expenditure—the key factor behind public debt—are also pronounced. The accompanying chart presents both actual deficits and structural deficits. The structural deficit is an estimate that ignores cyclical economic movements and uses econometric methods to indicate where governments must act to reach a durable balance in the budget. In 2022, almost all countries exhibited structural deficits close to the reported shortfalls, with two notable exceptions where cyclical factors helped reduce the gap: Ireland posted a public account surplus despite a negative structural balance of more than two percentage points of GDP, and Italy saw its reported deficit improve the structural deficit by more than one percentage point. Net interest on structural deficits is also shown, and it tends to be lower in highly indebted countries like Italy, Spain, and Greece.
The data help explain the positions seen at the latest Ecofin meeting. Countries with smaller deficits, such as Germany, the Netherlands, or Denmark, advocated quicker adjustments, while those with larger structural deficits, such as France or Spain, urged a slower pace if reforms would strengthen their broader economic competitiveness. In other words, some governments argued that faster consolidation might require deep cuts to public spending, suggesting a more gradual approach. A few even suggested that the most indebted members should aim for deficits around 1.5 percent of GDP, proposing a substantial tightening from the 3 percent limit set by the SGP.
Disagreement over the deficit size remains. Structural deficits are based on statistical estimates that can vary with the method used, producing different results. Some states, like Italy, have proposed excluding interest payments on debt from the deficit when assessing effort, arguing that reducing the budget gap through interest rate reductions is not straightforward for the most indebted. Others contend that properly applying new funding tools can extend the compliance window.
Final details could be agreed on shortly before the holiday period, pending a summit of heads of state and government. Deciding on reference thresholds, deadlines, or the exclusion of certain policies from deficit calculations will shape the coming period. The same discussions will set the stage for future revenue and spending measures, including potential tax changes or spending limits.