European Parliament Approves Reform of EU Debt Rules, Allowing More Budget Flexibility

The European Parliament has voted in favor of reforming the European Union's budgetary rules, granting member states greater flexibility in their national budgets. The new rules, which are part of the Stability and Growth Pact, stipulate that a country's debt must not exceed 60% of its gross domestic product (GDP) and its public deficit must remain below 3%.

Under the reformed rules, countries with debt exceeding 90% of GDP will be required to reduce it by an average of 1% per year, while those with debt between 60% and 90% of GDP must lower it by 0.5% annually on average. The reform also makes it more challenging for the European Commission to initiate procedures against countries with excessive deficits if essential investments are ongoing.

The previous budgetary regulations under the Stability and Growth Pact were suspended between 2020 and 2023 to help EU member states cope with the economic consequences of the COVID-19 pandemic and Russia's war in Ukraine. The reform was supported by the three largest groups in the European Parliament, although left-wing groups have criticized it as a tool to implement austerity measures.

Why this matters: The reform of the EU's debt rules has significant implications for the economic policies and budgetary decisions of member states. The increased flexibility could allow countries to invest more in essential areas such as infrastructure, education, and healthcare, potentially boosting economic growth and social welfare. However, critics argue that the new rules may lead to austerity measures and reduced public spending in some countries.

The German finance ministry expects the country's debt-to-GDP ratio to rise slightly to 64% in 2024, up from 63.6% in 2023, due to the planned Generational Capital pension scheme. However, the ratio is projected to fall steadily to 62% by 2028, still above the 60% limit set by EU fiscal rules. The ministry forecasts Germany's budget deficit to be 1.75% in 2024, down from 2.5% in the previous year, and between 1% and 1.5% from 2025 to 2028, all below the EU's 3% limit.

The Council must now give its formal approval before the new rules enter into force. Italian Economy Minister Giancarlo Giorgetti acknowledged that the new pact is an improvement compared to the previous budget rules. Deputy Premier and Foreign Minister Antonio Tajani said the Italian government's abstention in the vote does not mean they are against the pact, but rather that it can be improved.

Key Takeaways

• EU Parliament voted to reform budget rules, granting states more flexibility.
• New rules require debt reduction of 1% annually if over 90% GDP, 0.5% if 60-90%.
• Reform makes it harder for EU to initiate excessive deficit procedures for investments.
• German debt-to-GDP ratio expected to rise slightly in 2024, then fall below 60% limit.
• Italy sees new pact as an improvement, but abstained from vote to seek further changes.