European Parliament Votes on Stricter EU Budget Rules

The European Parliament is set to vote on Tuesday on reforms to the European Union's budget rules, known as the Stability and Growth Pact. The proposed changes aim to move the EU towards healthier public finances after the economic impact of the COVID-19 pandemic and Russia's war on Ukraine.

The updated regulations will require governments to get national spending under control, but they also provide greater flexibility for investment in critical areas such as the green and digital transitions, as well as defense. The old rules, which stipulated a debt limit of 60% of GDP and a deficit limit of 3%, were suspended between 2020 and 2023 to help the European economy weather the crises.

Under the reformed Stability and Growth Pact, each member state will have to present a four-year strategy to ensure the sustainability of their debt and reduce the deficit to below 3% of GDP. Countries can extend the plan to seven years if needed. The focus will be on how spending evolves rather than the deficit itself. Germany secured an additional requirement that all countries with excessive deficits must reduce their deficit overshoot by at least 0.5 percentage points of GDP per year.

Why this matters: The vote in the European Parliament is a critical step in overhauling the EU's spending rules, which have been a point of contention within the bloc. The reforms will have significant implications for the fiscal policies of member states in the coming years.

The proposed reforms have faced criticism from left-wing groups and trade unions, who argue that they will impose austerity on Europe and limit public expenditure on the green transition. The Greens group in the European Parliament has warned that the reforms could be an "economic disaster." Some observers believe the new rules still impose a "straitjacket" on member states, making it difficult to consolidate public finances while making major investments.

The vote in the European Parliament follows two years of lengthy and contentious negotiations between fiscally hawkish states and the bloc's most indebted nations. The reforms represent an effort to strike a balance between enforcing fiscal discipline and providing flexibility for investment in key areas. As Paolo Gentiloni, European Commissioner for Economy, stated, "The agreement reached is a strong signal of unity and solidarity at a time of great uncertainty."

Key Takeaways

• EU Parliament to vote on reforms to Stability and Growth Pact budget rules.
• Reforms aim to balance fiscal discipline and flexibility for key investments.
• Each state to present 4-year debt sustainability plan, extendable to 7 years.
• Reforms face criticism from left-wing groups, seen as imposing austerity.
• Reforms represent effort to strike balance between discipline and flexibility.