Ten days before the election, discussions about the Stability and Growth Pact and its budget rules resurfaced. Since the Covid outbreak, public spending has been freely available, and EU ministers have been debating how to manage deficits and debt. A political agreement was reached this Wednesday, signaling a new architecture for economic governance. The pact grants governments some freedom in how they adjust budgets while maintaining strict targets for deficits and debt reduction.
The new rules are challenging for some countries, especially Spain, which carries debt above 100 percent of GDP and a public deficit forecast of 3.2 percent for 2024 by Brussels.
“It has been long, intense and difficult, but in the end we managed to secure the best possible arrangement at the right moment,” stated the first vice-president of the Spanish government, speaking on behalf of Spain’s six-month Council Presidency after the video conference. Nadia Calviño noted the pact is balanced. Germany and the flexibility demanded by Italy, France, and Spain are expected to bring reliability to financial markets and clarity to citizens.
The latest phase, overseen by the individual who will assume the presidency of the European Investment Bank at the start of 2024, proceeded with France and Germany at the forefront. Bruno Le Maire and Christian Lindner were coordinating discussions and preparing for a final Paris meeting to resolve outstanding differences with Italy. It was not possible to settle all issues at the last Ecofin meeting in Brussels on 7 and 8 December. Paris and Berlin remained aligned on 90 to 95 percent of the text, but a few points needed resolution, which the current Spanish presidency has continued to address since then.
Negotiation with the European Parliament
The reform, preserving the core pillars of 3 percent of GDP for the public deficit and 60 percent of GDP for debt, will now be negotiated with the European Parliament before it is definitively confirmed. The aim is to reach an agreement in the first half of 2024, before the end of the current European legislative term. If plans proceed smoothly, fiscal rules should be in place during this political cycle. A vice-chair of the commission confirmed that new fiscal policy guidelines will take effect by 2025 in line with the revised rules.
The compromise draws on the Commission’s original April proposal but tightens terms by introducing stricter requirements driven by Germany’s insistence on debt and deficit reduction. Multi-year adjustment plans will be negotiated by each member state with Brussels, following a technical pathway set forth by the Commission. These pathways cover four years, with possible extensions up to seven years if governments commit to growth-enhancing reforms and investments aligned with EU goals—green and digital transitions, defense, and other priorities. The vice president emphasized that the new framework aims to be more reliable and realistic.
A single spending indicator will anchor new financial auditing. The primary spending measure excludes interest payments on debt. Countries with deficits above 3 percent of GDP will need structural adjustments of 0.5 percent of GDP annually, as under the existing rules. The agreement adds an innovation: by 2027, debt service increases will be considered when a country commits to invest and reform, potentially softening required cuts if conditions for growth and reform are met.
The deal also includes preventative safeguards to ensure that even well-performing economies continue to pursue sound budgeting and comply with the Stability and Growth Pact, which targets deficits near 3 percent of GDP. Public debt levels above 90 percent of GDP would require a yearly reduction of 1 percent, while levels between 60 and 90 percent would need a 0.5 percent yearly decrease. There is also a policy aimed at preserving a deficit below the 3 percent threshold while steadily reducing the gap to a 1.5 percent target to maintain a stable fiscal position during economic shocks.
Main challenges
The main hurdle has been achieving the aggressive 1.5 percent target for the primary structural deficit, which translates to a roughly 0.4 percent of GDP adjustment annually. Countries may qualify for a lesser effort if they implement reforms and invest strategically. The final stage also faced limits on allowable deviations from the spending ceiling. Negotiators agreed on a reasonable deviation cap for each country’s adjustment plan, with a near-zero bottom line once plans are finalized, though a few years might see temporary gaps that must be compensated later.
Sanctions
Regarding enforcement, the cap on sanctions was scaled back from 0.5 percent to 0.05 percent of GDP every six months, limiting immediate punitive measures. The negotiations preserved core elements: stronger medium-term budgeting, a common framework, and a tendency toward gradual fiscal adjustment that accommodates investment and reform commitments. Economic officials stressed that the agreement still advances prudent fiscal planning and stronger coordination among member states.
From the perspective of European leaders, the deal lays down a solid budget framework and encourages reforms across member states, while acknowledging the diversity of national situations. The overall package is seen as fostering trust among markets and citizens alike, with a focus on sustainable debt reduction and investment-driven growth. As experts observe, the outcome serves as a practical blueprint for fiscal policy in the EU going forward, aligning national budgets with shared growth goals and strategic investments.