Economic governance reform: improving credibility, ownership and scope for investment

New numerical values to define the required excessive debt reduction and deviations from expenditure plans to allow room for investment

An extra 10 year period for completing excessive debt reduction

New provisions to allow more investments and to increase national ownership of plans

The Economics Committee adopted its position on new economic governance rules, prioritising investment and national ownership and improving the system’s credibility.

MEPs in the Economic and Monetary Affairs Committee adopted three texts (see background below) with one containing substantial changes to the Commission’s original proposal, under the auspices of co-rapporteurs Esther De Lange (EPP, NL) and Margarida Marques (S&D, PT). The revised rules will constitute the backbone of the new EU economic governance system.

The most consequential of these texts will replace the regulation on multilateral budgetary surveillance, the so-called ‘preventive arm of the Stability and Growth Pact’.

More credibility

The text adopted by MEPs introduces minimum numerical values defining by how much a member state must reduce its excessive debt each year and how much it can overshoot on expenditure planning.

For countries with debt to GDP ratios between 60% and 90%, this ratio must reduce by at least 0.5% every year on average over the projected period (the period of time over which the fiscal adjustment takes place + 10 years), or by 1% for countries with debt to GDP ratios over 90%. The Commission proposal only stipulates that this ratio must be lower at the end of the period than at its beginning. In years of positive GDP growth, the committee’s text also establishes a maximum allowed deviation of 1% of GDP from the net expenditure path.

The text also requires the Commission to elaborate, through a separate act, how debt sustainability will be assessed, and sets out the framework for what this separate act must contain. This would give the Commission’s assessments a sounder, more predictable basis and enable more effective scrutiny by member state representatives and MEPs.

More leeway

Various provisions in the adopted text would allow member states more leeway to implement the rules. More categories of expenditure than proposed by the Commission would be excluded from the calculation of a government’s net expenditure, the variable which will be the basis for deciding whether or not a country’s debt is on a sustainable path.

The period within which member states must undertake corrections to return to a sound fiscal situation is extended by 10 years, effectively giving them at least 14 and potentially up to 17 years to correct their situation, enhancing the social and investment dimensions of the system.

MEPs also introduced a new exception whereby a member state may be exceptionally allowed by the Commission to deviate from its spending for a maximum period of five years, if this spending is for strategic investments addressing the common priorities of the EU.

Finally, in the event of a change of government, a member state can submit a new or revised fiscal plan to the Commission.

National ownership, investment, and the social and regional dimension all prioritised

MEPs also included numerous provisions aimed at strengthening the national ownership of debt reduction plans, increasing the scope for investment without this impacting a country’s debt sustainability assessment, and factoring in social and regional considerations.

The adopted text also strengthens the role of the European Fiscal Board and of the national independent fiscal institutions.

Quotes

Esther De Lange (EPP, NL) said, “With the current general escape clause coming to an end on 31 December, it is important to provide clarity about our new fiscal rules quickly. I am happy the European Parliament is now taking its responsibility in this. We need a credible economic governance framework based on sound rules, compliance and enforcement. We have ensured that the new economic governance will be more country-specific while maintaining an EU framework. To ensure a quantified minimum debt reduction for member states, we put a concrete figure on the required yearly debt reduction. We also establish a clear maximum deviation that member states are allowed from their net expenditure path. "

Margarida Marques (S&D, PT) said, “This agreement is a crucial step forward in more credible and flexible fiscal rules that support European citizens and companies. We are proposing to strengthen the investment, democratic, and social dimensions of this framework. The new rules should also increase the fiscal space and flexibility for member states to implement the social, climate, digital, and defence priorities of the EU and tackle unforeseen events, while simultaneously promoting long-term sustainable and inclusive growth.”

Vote results

Regulation of the EP and Council on the effective coordination of economic policies and multilateral budgetary surveillance (preventive arm of the SGP): 34 votes in favour, 22 against, 3 abstentions.

On the following two reports MEPs made changes to align the texts with the report they adopted on the preventive arm of the SGP:

Council Regulation amending the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure (corrective arm of the SGP): 36 votes in favour, 22 against, 1 abstention

Council Directive amending the Directive on requirements for budgetary frameworks of the member states: 47 votes in favour, 12 against, 0 abstentions.

Background

The preventive arm of the Stability and Growth Pact aims to ensure sound budgetary policies over the medium term by setting parameters for member states’ fiscal planning and policies during normal economic times.

The corrective arm of the Stability and Growth Pact ensures that member states adopt appropriate policy responses to correct excessive deficits (and/or debts) by implementing the Excessive Deficit Procedure (EDP).

The Directive on budgetary frameworks lays down detailed rules for national budgets. These are necessary to ensure EU governments respect the requirements of economic and monetary union and do not run excessive deficits.