2024-01-02 13:43:21
EU Economy and Finance Ministers reached a political agreement on the new European budgetary rules on Wednesday 21 December. This is an essential pact for the Twenty-Seven because it establishes the new legal framework within which the most indebted and deficit States will have to adjust their budgets after four years of budgetary indiscipline.
“The agreement on tax rules is important and positive news; it will bring certainty to financial markets and strengthen confidence in European economies. The Spanish Presidency led a negotiation process which today resulted in the agreement of the Finance Ministers of the 27 Member States, thus fulfilling the mandate of the European Council”declared the First Vice-President and Minister of the Spanish Economy, Trade and Enterprise, Nadia Calviño supported by the Economic Vice-President of the European Commission, Valdis Dombrosvkis, after an informal meeting of Ecofin (Economic and Financial Affairs Council).
Nadia Calviño welcomed a “unanimous” agreement which “guarantees” a sustained and progressive reduction of the debt and deficit, while leaving room to maneuver to protect public investments in priority areas for the EU, such as the transition green and digital, defense and social spending. The vice president added that the new framework is more “realistic” and responds “to the post-pandemic reality”in which EU countries accumulated a debt that exceeded 83.5% of GDP last year, as well as a deficit of 3.2%.
New framework and flexibility in tax adjustment
The new framework, based on the experience of the recovery plans of the New Generation euro funds, gives a much more important role to countries. Governments will take the initiative and present personalized multiannual plans, which will have to be negotiated with the European Commission and approved by the Council. Previously, it was Brussels which imposed the adjustment program. The structural debt reduction plans will last four years, extendable to seven years if member countries integrate reforms and investments.
However, the pace of fiscal adjustment — which can be done either by reducing spending or increasing revenue — will be quite demanding for countries with higher debt and deficits. Those whose commitments represent more than 90% of GDP will be obliged to reduce them at a rate of 1% per year, this rate being reduced to 0.5% for countries whose debt is between 60 and 90% of GDP.
Two budget scenarios
Two scenarios should be distinguished. On the one hand, there are countries engaged in an excessive deficit procedure. These nations will have to maintain a structural effort of 0.5%. The novelty of this system, compared to the previous one, lies in the fact that the Commission, when determining the required effort, will take into consideration the increase in interest on the debt. This approach aims to establish a more regular curve and to grant each country an investment margin. Each government could benefit from flexibility of up to 0.2%. It is important to emphasize that this does not mean an exemption, because the adjustment will have to be made eventually. However, it will not be immediate, but rather scheduled a few years later, thus preserving the possibility of investing, which is essential, especially in times of crisis.
The second case is that of countries which are not in the excessive deficit procedure (EDP) but which must continue their consolidation. When the country manages to exit the EDP, another regulation applies. The Commission will carry out a debt sustainability analysis and calculate the level of effort needed to bring it down to 1% per year and the deficit gradually to 1.5%, the new comfort margin.
Assessment of the Spanish presidency and prospects for 2024
The reform of tax rules is probably the most important issue that was negotiated during the Spanish presidency of the Council of the EU, which ended on December 31. After receiving the approval of the Twenty-Seven, the text must be approved by the European Parliament to enter into force in the first quarter of 2024.
The revision of the Stability and Growth Pact, legislation governing tax rules, has been at the center of discussions since 2021. The European Commission initiated the process by presenting the first communication on its reform in December last year. This file was then submitted to the European Council, which formulated its recommendations last March. The negotiations faced delays due to disagreement between supporters of stricter budgetary guidelines, mainly led by Germany, and states with more precarious budgetary situations, notably led by France. The latter pleaded in favor of budgetary discipline accompanied by room for maneuver for public investment. The talks reached a critical point in December, ultimately resulting in a unanimous agreement signed by all parties.
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