Fiscal reforms agreed by EU governments
European Union finance ministers agreed on Wednesday on changes to the EU’s fiscal rules updating them to the post-pandemic realities of high public debt and the need for massive public investment to fight climate change.
The pact is complex but is built on two crucial principles: an upper limit for a country’s national budget deficit, and an upper limit for its total public debt.
The rules shift the focus from the annual deficit and debt to net primary expenditure every year – a fiscal indicator which measures those spending components under a government’s direct control. The European Commission and the country concerned agree on a path for net primary expenditure for four years, to cut the debt and deficit to below the EU’s limits of 3% and 60% of gross domestic product (GDP) respectively.
The four years to bring down public debt through control of government spending can be extended to seven years if a government makes certain types of investments and reforms.
Reforms and investment in green and digital technologies and approved by the EU to pay out in cash from its post-pandemic recovery fund, if they include ambitious reforms and investments, in particular with regards to economic growth and fiscal sustainability over the medium term are enough to automatically extend the time.
To make fiscal consolidation faster for countries that have high debt like Greece, Italy or France, the new rules set a minimum average annual amount of debt reduction.
The upper limit for a budget deficit remains 3% of GDP, but the new rules introduce a “deficit resilience safeguard” – a margin below the 3% ceiling that would be used in planning the spending path, to make sure the government has room for maneuver even when something unexpected happens, without breaking the 3% EU limit.
Additionally, defense spending gained a special status in the EU’s fiscal policy for the first time.
“A lengthy European negotiation has successfully concluded for Greece today. A longstanding request from successive Greek governments, seeking an exemption for defense investments from the calculation of the excessive deficit, is accepted for the first time,” emphasized Finance Minister Kostis Hatzidakis.
“Simultaneously, there is explicit positive reference to the issue that will arise in 2033 regarding the calculation of interest on loans in the official sector of Greece’s public debt, thus relieving the country from a headache regarding EU fiscal rules,” he added.
[Reuters/Kathimerini]
