The reform of fiscal rules proposed by the European Commission will prohibit public spending from growing above GDP in countries with more than 60% debt or 3% deficit, which will have to present consolidation plans four to seven years ahead.
Europe already has the new rules of the budgetary game proposed by Brussels on the table. After years of suspending deficit and debt targets to allow EU partners to fight the Covid-19 crisis with their hands free, the European Commission on Wednesday presented the fine print of its proposed redesign of the fiscal rules.
The document, presented at a press conference on Wednesday by the Commission’s economic vice-president, Valdis Dombrovskis, and the European Commissioner for the Economy, Paolo Gentiloni, seeks to offer a Solomonic solution that satisfies the different European sensibilities.
On the one hand, the proposal involves starting to rebalance the EU’s ailing public accounts with consolidation plans tailored to each country. On the other, the plan seeks to please Germany and the other guardians of fiscal orthodoxy by demanding a significant volume of annual budgetary adjustments from non-compliant countries and restricting their ability to continue raising public spending.
In fact, the European Commission advocates keeping in place the traditional 3% deficit and 60% public debt limits already in place, applying excessive deficit protocols in the event that the fiscal hole exceeds this ceiling. From then on, Brussels will require Spain and the rest of the states with high budget imbalances to make an annual fiscal adjustment of at least 0.5 GDP points per year until the deficit is reduced from 3 per cent. The restructuring of public accounts, through revenue and expenditure, must be included in a four-year fiscal consolidation plan, which can be extended to seven years if structural reforms and investments are committed, subject to permanent control by Brussels.
Beyond this, the European Commission establishes as a general limitation that countries with high indebtedness cannot increase their annual net expenditure above GDP growth to prevent imbalances from worsening. The proposal, which must now be discussed by member states – with whom Brussels has been negotiating for months – and the European Parliament, also includes lowering fines for non-compliant countries, with the aim of making them more realistic and applying them in a more orthodox manner.