EU seeks to modernize its budget rules

The European Commission is due to present its plan tomorrow to reform the budget rules of the European Union (EU), seen by various countries as outdated and extraordinarily complex.

“It’s time to do it. If we don’t do it now, when?”, recently warned the European Commissioner for the Economy, Paolo Gentiloni.

These rules, embodied in the Stability and Growth Pact, were suspended at the beginning of 2020 to avoid a collapse of the European economy affected by the Covid-19 pandemic, although they must be reactivated at the end of 2023.

The Stability Pact is an instrument that was adopted by the countries of the euro zone in 1997 to prepare the ground for the arrival of the single currency on January 1, 1999.

This rigid set of budget rules takes up the criteria of the Maastricht Treaty (1992), with two emblematic and untouchable pillars: public administration deficit limited to 3% of national GDP and debt limited to 60% of GDP.

In case of non-compliance, the pact provides for a procedure that can lead to sanctions, but these were never applied.

To return to respecting the pact’s rules, countries that exceed these limits must propose a corrective trajectory of several years, negotiated with the European Commission.

Theoretically, excess debt above 60% should be reduced by 1/20 per year, but this rule is considered inapplicable, as it would impose devastating austerity on already heavily indebted countries.

There are two opposing blocs in the EU. One of them is known as the “frugal” group, from northern Europe and led by Germany. They are those who believe that the pact is not applied with enough severity.

Meanwhile, the over-indebted countries of southern Europe (such as Italy, whose debt reaches 150% of GDP) consider that the structure is too rigid.

For this second group, the strictest vision penalizes public investment at a time when European states must spend massively.

“In these two poles, some ask for more automatic rules and the others ask for more flexibility. Thus, they define the main lines of the reform”, pointed out Andreas Eisl, a researcher at the Jacques Delors Institute.

There is one point, however, on which there is unanimity: everyone criticizes the complexity of the current rules.

For Gentiloni, the new framework adopted should allow a simplification of the mechanism and a better implementation, to guarantee both debt and sustainable growth.