Finance: EU countries agree on principles for new debt rules

The finance ministers of the EU states have agreed on plans to reform European debt rules.

Finance: EU countries agree on principles for new debt rules

The finance ministers of the EU states have agreed on plans to reform European debt rules. Among other things, they stipulate that the individual situation of the countries will be taken into account more than before, as was said after a video conference of the finance ministers on Wednesday.

Germany very satisfied

Federal Finance Minister Christian Lindner is betting that the new rules in the EU will lead to lower budget deficits and annually falling debt ratios. “The culture of stability in Europe has been strengthened,” said the FDP politician after the agreement. "There are clear figures for lower budget deficits and a reduction in national debt." At the same time, there are also incentives for investments.

In the evening, France's Finance Minister Bruno Le Maire spoke of excellent news for France and for Europe in a video on the X platform (formerly Twitter). For the first time in 30 years, the rules would recognize the importance of structural reforms and investment. This involves, for example, investments in climate protection and defense, which will be absolutely necessary in the coming decades.

What the states want to apply in the future

According to the compromise, EU countries will in future have to submit their respective four-year financial plans to the EU Commission. However, there is the possibility of extending the budget adjustment period to seven years if they commit to carrying out strategic investments and reforms, the Spanish Presidency said. “This will lead to better compliance as conditions are tailored to governments’ priorities and their specific needs.”

In principle, the previous goals of the so-called Stability and Economic Pact remain: debts should be limited to a maximum of 60 percent of economic output and budget deficits should be kept below 3 percent. In addition, according to the information, protective measures are planned: Highly indebted countries (debt levels of over 90 percent) must reduce their debt ratio by one percentage point annually, and countries with debt levels between 60 and 90 percent by 0.5 percentage points. Germany in particular had insisted on this condition.

Spanish Economy Minister Nadia Calviño said: "The rules are more realistic." They correspond to the reality after the pandemic and also take into account the lessons learned from the major financial crisis. It will also ensure that the states' multi-year financial plans are not changed by political changes.

Berlin and Paris have long been at odds

For months, Europe's finance ministers had struggled to find a compromise to reform the so-called Stability and Growth Pact. According to the responsible Spanish Presidency, more than forty meetings took place at a technical level. The negotiations were based on a proposal from the European Commission, which instead of providing uniform guidelines for debt reduction, provided for individual paths for each country.

The EU heavyweights Germany and France have long had very different opinions. Berlin insisted on uniform guidelines for debt and deficit reduction in highly indebted countries - which Paris rejected. The agreement between the 27 countries was preceded by a German-French proposal, which Lindner and Le Maire agreed on on Tuesday evening. An agreement without communication between Paris and Berlin was considered almost impossible.

Finally, according to reports, it was still a matter of getting the green light from Italy. Rome had long signaled that it would not accept strict rules. Italy's Finance Minister Giancarlo Giorgetti said after the agreement: "There are some positive things and some not so positive." However, Italy has achieved a lot. "Above all, what we are signing is a sustainable agreement for our country, which aims, on the one hand, at a realistic and gradual debt reduction and, on the other hand, looks at investments in a constructive spirit."

Why the rules should be reformed

The current regulations for debt reduction in EU countries date back to the 1990s and are considered complicated and, according to critics, strict. So far, states have normally had to repay 5 percent of debts that are above the 60 percent mark per year.

Due to the Corona crisis and the consequences of the Russian attack on Ukraine, the rules are temporarily suspended until 2024. Many countries exceed the limits primarily because they borrowed a lot of money during the pandemic to support the economy. But even before the pandemic, the rules were often ignored - including by Germany. A return to the old rules was seen as a threat to Europe's economic recovery. The aim of the reform was also to make it simpler.

How it goes on

Before the new rules can come into force, they must be adopted by the states and negotiated with the European Parliament. It is expected that the legislation will be finalized before the European Parliament elections. The European elections will take place at the beginning of June 2024.