EU agrees on looser fiscal rules to cut debt, boost investments

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Written By Pinang Driod

© Reuters. FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, March 1, 2023.REUTERS/Johanna Geron/File Photo/File Photo

By Foo Yun Chee

BRUSSELS (Reuters) – EU member states and MEPs struck a preliminary deal on Saturday to ease the bloc’s stringent fiscal rules, giving governments more time to reduce debt as well as incentives to boost public investments in climate, industrial policy and security.

The latest revamp of two-decades-old rules known as the Stability and Growth Pact came after some EU countries racked up record high debt as they increased spending to help their economies recover from the pandemic, and as the bloc announced ambitious green, industrial and defence goals.

The new rules set minimum deficit and debt reduction targets but these are less ambitious than previous figures.

“At a time of significant economic and geopolitical challenge, the new rules will allow us to address today’s new realities and give EU member states clarity and predictability on their fiscal policies for the years ahead,” European Commission Vice-President Valdis Dombrovskis said in a statement.

“These rules will improve the sustainability of public finances and promote sustainable growth by incentivising investment and reforms,” he said.

Commenting on the deal, MEP Margarida Marques said: “With a case-by-case and medium-term approach, coupled with increased ownership, member states will be better equipped to prevent austerity policies.”

The revised rules allow countries with excessive borrowing to reduce their debt on average by 1% per year if it is above 90% of gross domestic product (GDP), and by 0.5% per year on average if the debt pile is between 60% and 90% of GDP.

Countries with a deficit above 3% of GDP are required to halve this to 1.5% during periods of growth, creating a safety buffer for tough times ahead.

Defence spending will be taken into account when the Commission assesses a country’s high deficit, a consideration triggered by Russia’s invasion of Ukraine.

The new rules give countries seven years, up from four previously, to cut debt and deficit starting from 2025.

But a member state with excess debt would not be obliged to reduce this to under 60% by the end of the period of the seven years, as long as it is on a plausible downward path.

EU countries and European Parliament will need to formally endorse the preliminary deal reached by the negotiators on Saturday before it can take effect next year

The deal on Saturday was reached by negotiators from the EU Council of Ministers and the European Parliament. They need to formally endorse the preliminary deal before it can take effect next year.

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