Eurogroup says new fiscal rules will require public spending cuts

The European Union’s new fiscal rules will require a reduction in net government spending next year, but critical investment needs will remain paramount, Eurozone finance ministers said on Monday (11 March).

“Based on the latest available data, the requirements of the revised economic governance framework would translate into an overall slightly contractionary fiscal stance in the euro area in 2025,” reads a Eurogroup statement published after a meeting in Brussels on Monday afternoon.

The document adds that such a contractionary policy is “appropriate in light of the current macroeconomic outlook”, namely the need to “enhance fiscal sustainability” and ensure the continuing reduction of Europe’s inflation crisis.

The Eurogroup statement follows multiple experts’ explicit warnings that the so-called ‘revised economic governance framework’, agreed in trilogue discussions last month, risks jeopardising the EU’s ability to achieve its target of net-zero carbon emissions by 2050.

It also comes amid an ongoing fiscal contraction across the EU, with the bloc’s overall budget deficit set to fall from 3.2% to 2.8% this year, according to the European Commission’s latest forecast.

The admission is likely to reignite debate over the EU’s ability to finance the green transition and protect investment in the bloc’s economy.

Many experts believe that such fiscal consolidation has, in turn, contributed to the EU’s anaemic recent GDP growth: last week, the European Central Bank downwardly revised its 2024 growth forecast for the eurozone from 0.8% to 0.6% — just 0.1 percentage point more than in 2023.

A fine balancing act

However, Pierre Gramegna, the managing director of the European Stability Mechanism (ESM), denied that member states’ adherence to the new budgetary strictures will entail public investment cuts.

“The focus should be… on cutting less productive expenditures, in particular, I think energy support measures, and on the other side and to avoid [a reduction of] public investment,” he said.

“Only if we manage to not reduce public investment will it be possible to boost the competitiveness of our European economies,” he added.

EU Commissioner for Economy Paolo Gentiloni similarly emphasised the “enormous amount of investment” required for the EU to meet its climate, digital, defence, and social spending objectives.

Moreover, he admitted that guaranteeing that “the much-needed fiscal adjustment [does] not lead to investment cuts” will be a “really difficult balance to find”.

However, he suggested that most of the required investments will ultimately be provided by the private sector: a process which, he claimed, will be facilitated through further integration of the EU’s Capital Markets Union.

“It is what it is,” Gentiloni said. “This [investment] will mostly be coming from private resources and all of the discussion we are having on Capital Markets Union is also addressed to this.”

The EU’s new fiscal rules, first proposed by the European Commission in April 2023, amend those enshrined in the bloc’s Stability and Growth Pact (SGP) in the 1990s.

They maintain the SGP’s original deficit and debt thresholds of 3% of 60% of annual GDP, respectively, but loosen the SGP’s requirement to cut national excess debt-to-GDP by 1/20th each year.

In particular, member states that contravene the aforementioned limits must follow individually tailored budgetary plans set by the European Commission, detailing how they can approach fiscal compliance within a four-year (or, in some instances, a seven-year) period.

Nevertheless, the new rules maintain numerical benchmarks that all member states must adhere to. Countries with debt-to-annual GDP ratios above 90% must reduce their deficit by one percentage point annually on average, while those with debt levels between 60% and 90% of annual debt must cut their debt ratios by 0.5 percentage points on average each year.

Furthermore, all member states must aim for a deficit level below 1.5% of annual GDP, to provide a ‘fiscal buffer’ beneath the official 3% limit.

The SGP was suspended in 2020 to allow for higher deficit spending during the Covid-19 pandemic. The suspension was later extended to 2024 after Russia’s full-scale invasion of Ukraine in February 2022 sent energy prices soaring across the EU.

[Edited by Anna Brunetti/Alice Taylor]