Stability Pact: the European Union close to an agreement on the reform of its budgetary rules

The outcome seems near

Stability Pact: the European Union close to an agreement on the reform of its budgetary rules

The outcome seems near. The finance ministers of the European Union (EU) are meeting on Wednesday December 20, from 4 p.m. by videoconference, to try to find a compromise on the reform of budgetary rules. The issue has divided the Twenty-Seven for two years but seems to be on the verge of being resolved after the Franco-German rapprochement made on Tuesday evening.

“We have a 100% agreement this evening” between France and Germany, declared the French minister, Bruno Le Maire, on X, after a meeting in Paris with his German counterpart, Christian Lindner. He stressed during a press briefing that Italy was also “exactly on the same line” as Paris and Berlin. Mr. Lindner said he was “convinced” that this breakthrough would enable an agreement of the Twenty-Seven on Wednesday.

The reform must modernize and soften the stability pact, a “fiscal corset” created at the end of the 1990s which theoretically limits the public administration deficit for each country to 3% of GDP and the debt to 60%. While confirming these emblematic thresholds, the new text must make the adjustment requested from EU countries in the event of excessive deficits more flexible and realistic. Considered too drastic, it was never really respected.

North and South in search of a common position

If everyone agrees on a need for modernization, the indebted countries of southern Europe, like France, insist on additional flexibilities in order to protect the investment necessary for the green transition and spending military forces generated by Russia's invasion of Ukraine. Conversely, the so-called “frugal” countries of the north, behind Germany, are calling for constraints to achieve effective debt reduction throughout the EU.

Time is running out to find a common position. The stability pact has been deactivated since the beginning of 2020 to avoid a collapse in economic activity affected by the Covid pandemic and then by the war in Ukraine. It will be reactivated on January 1st. A lack of agreement on the new rules before this date would affect the credibility of the EU vis-à-vis financial markets.

The Twenty-Seven also hope to be able to conclude the legislative process before the European elections in June on this text which must still be negotiated with the European Parliament.

“We are getting closer to an agreement satisfactory for all parties concerned,” confirmed a European diplomat in Brussels on Tuesday evening. “What we have on the table today is a balanced approach. We think there is a chance tomorrow to lock in this political agreement,” he said.

Evolution of expenses

The draft text provides for rules more adapted to the particular situation of each country. Budgetary trajectories would thus be both more realistic and better applied. Concretely, Brussels is proposing that States present their own adjustment trajectory over a period of at least four years in order to ensure the sustainability of their debt. Reform and investment efforts would be rewarded by the possibility of extending this budgetary adjustment period to seven years, so that it is less brutal.

Above all, the control would relate to the evolution of expenditure, an indicator considered more relevant than the deficits which can fluctuate according to the level of growth. In order to satisfy Germany, however, it is planned that all countries with excessive deficits will be forced to make a minimum effort to reduce the deficit ratio, which could be 0.5 points per year.

Berlin also obtained that a public deficit target of 1.5% of GDP be assigned to the most indebted countries, in order to preserve a margin of safety compared to the 3% ceiling. A minimum effort to reduce the debt ratio by 1 point per year was also demanded by Germany. These figures, which quantify the efforts required of each country, were at the heart of the latest Franco-German adjustments discussed in Paris on Tuesday evening.