After the revision of economic governance was postponed due to the Covid-19 pandemic, the European Commission finally presented a reform proposal in April 2023. The previous fiscal rules were already in major need of revision even without the crisis and had been quite rightly suspended at the start of the pandemic. However, instead of making the governance balanced in the course of the revision and consistently aligning it with the EU's economic policy objectives - such as the sustainable development of prosperity and well-being in particular - the focus remained one-sidedly on deficit and debt reduction. The revision was ultimately limited to an amendment of the corrective and preventive arm of the Stability and Growth Pact and a directive on the requirements for budgetary frameworks of the Member States.

National budget plans at the centre of fiscal policy
The EU's new economic governance framework focuses on national fiscal-structural policy plans, which will generally cover a four-year period. The medium-term fiscal targets must be met by the end of this period. However, if a package of reforms and investments is put together, the Member States will be given more time to achieve the fiscal targets, namely seven years. According to the EU Commission, this package must either promote the green and digital transitions, strengthen economic and social resilience or Europe's security capacity. The EU Commission plays a key role because it scrutinises the national plans when they are submitted and subsequently monitors the annual progress - measured primarily by the growth in government spending. However, based on the Commission's analysis the Council still formally approves the plans or imposes sanctions in the event of significant deviations. The direction taken in the course of economic governance therefore depends deeply on the EU Commission and subsequently on the Council. Their room for manoeuvre with regard to a possible extension of the plans and thus possible fiscal policy relief is considerable.

Medium-term fiscal targets: Limiting deficit and debt
The reform debate in the Council focussed on the specific values for the medium-term fiscal targets, which determine the spending path to be adhered to by Member States. The controversial Maastricht targets as a reference point in the corrective arm remain unchanged, i.e. a maximum nominal deficit of 3 % and a public debt ratio of max. 60 % of GDP. If the deficit criterion is breached, a consolidation of the national budget must be initiated immediately, whereby the deficit must be lowered by at least 0.5 % of GDP per year.

If the debt criterion has been breached, as before, a procedure will be triggered if the government debt ratio does not fall quickly enough, although the criteria for this have now been relaxed: Instead of having to reduce at least 1/20 of the difference each year, one percentage point per year is now sufficient (or 0.5 for countries with a government debt ratio between 60 and 90 %). This eases the situation for all countries with a ratio of over 70 % of GDP (the eurozone average is currently 90 %). The aim of the preventive arm has also been significantly relaxed: instead of a maximum deficit of 0.5 % of GDP, 1.5 % of GDP is now permitted - there is no longer any additional limit if the government debt ratio is below 60 % of GDP. This is a significant step forward, as this additional percentage point provides greater room for manoeuvre, which enables necessary investments - particularly for climate protection.

Problems remain
With the medium-term definition of a cap path for public spending, there is now more predictability than with the previous questionable estimate of the "structural deficit". Nevertheless, the old problem of vulnerability to revision does not disappear. If there is an economic downturn accompanied by high inflation, the expenditure path cannot be adhered to even if revenues increase more than planned due to inflation. This is exacerbated by the innovation that deviations are posted to control accounts, so that even relatively small deviations can be quickly penalised.

Another new feature is the Debt Sustainability Analysis, which analyses whether there is even the slightest risk of the government debt ratio rising again within the ten years following the end of the plan. However, it is an extremely risky endeavour to make immediate additional cuts on the basis of an estimated development of the debt ratio from now until 2041 (assuming a seven-year plan). Once again, current policy is subject to more or less good estimation methods instead of observable variables. Politically, this method puts the focus on demographics-driven public spending.

Too little room for future investments
Once consolidation has been completed, in particular, the new rules will increase budgetary room for manoeuvre - including for investments. However, some countries currently have high debts and/or deficits, meaning that their room for manoeuvre remains limited. Once the funds from the Recovery and Resilience Facility (RRF) expire, they will hardly be able to cut back even more in order to be able to increase their investments. The only improvement in the final phase of negotiations on the new economic governance was that at least expenditure, which is made as part of the national co-financing of EU programmes, will not be restricted by the expenditure rule.

The benefits of this exception depend on two factors: in the short term, on whether RRF part-financed expenditure comes under this rule; in the medium term, on the design of the EU financial framework 2028-2034, for example whether the RRF is relaunched in a similar form. If both answers are negative the exception rule is negligible. The largest remaining part concerns the cohesion policy, which is co-financed by the EU Member States in the Multiannual Financial Framework 2021 to 2027 with a total of 163 billion euros, of which 1.8 billion euros come from Austria. In Austria, this would just amount to 260 million euros per year, which can be invested this way. In addition, national co-financing is limited by existing national debt brakes in some countries.

In contrast, the EU Commission's 2023 Strategic Foresight Report states that the EU needs an additional 620 billion euros per year to achieve the climate targets of the Green Deal and the energy targets of REPowerEU. Although the figure refers to public and private investments, the planned regulation does not provide a solution. In order to fulfil the EU Commission's objectives and make economic governance fit for the future, there should be much more scope for investment in socio-ecological measures.

How social and democratic are the new rules?
As part of the EU Commission's budget review, the principles of the European Pillar of Social Rights and the risks of social coherence are taken into account and measured. This means that there is at least a chance of extending the fiscal-structural plans from four to seven years, what is a positive development. However, caution is advisable. According to various calculations, the member states still have to make huge cuts in order to meet the national debt targets. Although the cuts required are now significantly lower than under the old rules, there are still fears of cuts in social spending, as there are no clear political majorities in favour of higher wealth taxes, for example.

In addition, European fiscal policy must become more democratic. For example, the regulatory supremacy of the EU Commission in the assessment of budget plans is one of the main points of criticism regarding the new rules. Overall, greater involvement of national parliaments, the EU Parliament, civil society and social partners in fiscal policy and its monitoring is necessary in order to increase the democratic legitimacy of economic governance.

Outlook
The agreement between EU Parliament and the Council on the EU's economic governance framework still needs to be formally adopted before it comes into force. The vote in the EU Parliament is expected to take place in the last plenary session of this legislative period in April. Before the new regulations are applied in the upcoming year, the European Commission will work together with the Member States to draw up a proposal on their net expenditure paths so that the first versions of the national fiscal-structural plans can be submitted to the European Commission by 20 September 2024.

Further information:
AK EUROPA: EU Economic Governance Review
AK EUROPA: New proposal for EU fiscal rules unconvincing
AK EUROPA: Making economic governance in the EU more democratic
ETUC: Position on the Reform of the economic governance