The fiscal rules reform will play a huge role in determining how the EU tackles some of the monumental challenges Europe faces, such as achieving a just transition to a more sustainable future. However, rather than making social, environmental and climate concerns a clear priority, the European Commission is instead showing a lack of ambition in the proposals to reform the EU fiscal rules.
The Commission’s proposal to prioritise outdated debt and deficit-to-GDP ratios means that avoiding austerity and addressing Europe’s major challenges will be even more difficult. Especially so once the Recovery & Resilience Facility (RRF) funds will run their course in 2026.
To get to the bottom of what these proposals entail, we’ve dived into the details of this long proposal (three legislative documents and one annex) to share what it really means for social Europe.
Need a reminder of everything that’s happened so far before you jump into our analysis? Catch up on our views around the public consultation (our blog), fiscal guidance for 2023 (our blog), initial Commission orientations for (our blog) and Council conclusions (our blog) on the reform.
Our verdict in brief
Let’s start with the good news. The proposal does take a step in the right direction, incorporating some of the demands of civil society organisations and trade unions: it scraps an unrealistic and damaging one-size-fits-all debt reduction rule and moves instead to country-specific debt and deficit adjustment paths as well as reform and investment commitments, all of which must be included in national fiscal-structural plans.
The disappointing, but not unexpected, news is that 60% debt-to-GDP and 3% deficit-to-GDP ratios remain front and centre of this proposal. Even though the approach to debt reduction is somewhat improved, it will still limit our room for manoeuvre to tackle the massive societal challenges we face. Unfortunately, the approach to deficit reduction remains unchanged. In addition, safeguards added after a pushback by more frugal Member States risk austerity making a return for some countries. The proposal would force countries to decrease their deficits by 0,5% of GDP each year, if they breach the 3% deficit-to-GDP limit after the adjustment period. We are highly concerned that this would require countries with high deficit ratios to implement significant and fast budget cuts. Moreover, under the proposal, net expenditure growth needs to remain below medium-term output growth – the total economic activity in the production of new goods and services – over the horizon of the plan.
These proposals would be incompatible with the huge social and green investment needs we face. There is a risk that too fast of a decrease in deficits could lead to decreases in expected growth, putting our economies in a vicious pro-cyclical circle of increases in debt-to-GDP ratios and decreases in expenditure, which could mean austerity, rising inequalities and failed just transitions.
Some improvements compared to the current rules (but with a few caveats)
The debt of countries with levels above 60% of GDP must, at the end of the adjustment period, be on a declining path or be already at what is considered a prudent level and stay there over a 10-year horizon. The debt ratio at the end of the adjustment period must be below the ratio in the year before the start of the period.
For Member States with ratios above 60% debt-to-GDP or 3% deficit-to-GDP, the adjustment period can be extended by three years in exchange for reform and investment commitments. Altogether, these commitments must be growth-enhancing, support fiscal sustainability and address common priorities of the EU (which include the European Green Deal and the Social Pillar). Unfortunately, the obligation for reforms and investments to increase resilience has not been included in the text. In addition, the annex listing assessment criteria for these commitments states that they must, as a whole, contribute significantly to at least one of the defined priorities of the Union – not several or all. We will aim to modify the annex, as progress on multiple EU priorities is needed to create more sustainable and inclusive economies and societies. These commitments must also respond to main challenges identified within the European Semester, including in country-specific recommendations (CSRs) and be in line with commitments under the Recover & Resilience Facility (RRF). Finally, they must also be sufficiently detailed, front-loaded, time-bound and verifiable (through quality indicators). Member States must also guarantee that the overall level of nationally financed public investment over the course of the plan is higher than the medium-term level before the period of the plan.
In their plans, Member States must, among other things, include budgetary liabilities related to the costs of ageing and climate disasters, which is welcome. In addition, they must report on the consultations of social partners, civil society organisations (CSOs) and other stakeholders. This is positive; however, consultations cannot be a tick-the-box exercise as we have seen during the development of National Recovery & Resilience Plans. They must fully involve CSOs in defining fiscal trajectories as well as reforms and investment commitments with governments and within independent fiscal institutions (IFIs).
Our main concerns
We are very concerned about the maintained approach to deficit reduction. Member States with deficits above 3% of their GDP must bring down and maintain their deficit below 3% over the course of the adjustment period of four or seven years (in case of an extension) and make sure it stays there over a 10-year horizon. As mentioned above, the added safeguards are a major concern.
Some of the proposals could, potentially, be a double-edged sword. The obligation for reforms and investments to address challenges identified in the European Semester, including in CSRs, could strengthen their implementation and increase the impact of the process. This is positive, at the same time, it will require deep reform of the process to ensure that CSRs address macroeconomic, fiscal, employment, social and green priorities on an equal footing and in a coherent way, which is currently not sufficiently the case (for more information on our views on Semester reform, read our last report). In addition, the national fiscal-structural plans will replace the Stability or Convergence Programmes and National Reform Programmes under the European Semester. It is important to make sure that the inclusion of the fiscal rules reform in the process does not further imbalance it towards an even stronger focus on macroeconomic and fiscal priorities compared to social, employment and green ones.
Similarly, the proposal foresees that if the set of reform and investment commitments in exchange for an extension is not implemented in time, the extension period could be shortened. While it is good to incentivise Member States to stick to their commitments, it could lead to people not benefiting from reforms and investments while also suffering from the impact of a faster debt and/or deficit reduction.
Next steps
We are working with our partners in the Fiscal Matters Coalition to improve the proposal through amendments, aiming to engage with the EU institutions. One idea to avoid damaging deficit reduction speed, discussed by trade unions and civil society, could be to set the same rule for deficit reduction as for debt reduction: instead of reaching 3% of deficit-to-GDP by the end of the adjustment period, Member States should be on a declining path or at a prudent level by then.
Several additions could improve this proposal, which are unfortunately contested by several EU Member States and have therefore not been included by the European Commission: a golden rule for social and green investments and/or a commitment for a permanent European fiscal capacity, a successor fund to NextGenerationEU. If none of these demands is taken up, it will be crucial to improve the proposal to free up the necessary fiscal space for Member States to invest in just green transitions and a more social Europe. Quick and decisive action will be needed if the EU institutions want to achieve the very ambitious timeline they set for themselves: to reach an agreement by the end of this year.