Eleven EU countries, including France and Italy, are at risk of facing penalties from the European Commission for excessive government spending once new budget rules come into force this year.

The specific countries, according to with the Financial Times, they ran budget deficits last year larger than the 3% of GDP limit allowed under EU rules. The Commission will decide in June whether to launch so-called excessive deficit procedures (EDPs). Eurozone countries could face fines if they do not correct their course, while countries outside the euro face reputational risks.

Sanctions are almost certain for France, Italy and Belgium, whose deficits exceed 3% and their plans do not envisage compliance with the rules for the coming years.

These fiscal rules were suspended during the Covid-19 pandemic etcand are now being re-applied after the reform, including clauses that provide more scope for defense investment.

The new rules are further burdened by the decision of the European Central Bank, according to which countries could be excluded from the new but untested bond buying program that do not act in accordance with the recommendations of the IMF.

Some countries, including Spain and the Czech Republic, argue that their deficit will return to 3% or below this year and should not be penalized for temporary non-compliance.

“There may be borderline cases,” Valdis Dombrovskis, the committee’s executive vice-president for economic affairs, told the Financial Times. “If there is a country whose excessive deficit is close to 3% but it is temporary, we may decide not to use the excessive deficit procedure. The 2024 budget can be considered.”

Non-eurozone Romania is currently the only country in EMU.

They are pushing for an exception

Poland and Romania, as well as Slovakia, eurozone members, are pushing for an exemption on the grounds that military spending created by Russia’s invasion of Ukraine has pushed them over the line.

“Poland has the highest defense spending among NATO countries, higher than the US. This is an exceptional situation that must be taken into account when assessing the excessive deficit process, and the new EU fiscal rules have been put in place for this,” Andrzej Domański, Poland’s finance minister, told the Financial Times.

Poland ran a deficit over 5 percent in 2023 and spent 3.9% of its GDP on defense in the same year, meaning its non-defense deficit was below the 3 percent threshold.

“We are in dialogue with the Commission and there is an understanding that such costs should be taken into account,” Domański said.

Defense spending “is one of the relevant factors” in determining whether or not to initiate an excessive deficit process, Dombrovskis said.

But not all defense spending qualifies for leniency. Under the EU’s reformed budget rules, “the increase in public investment in defence” can be reduced, but not recurrent defense spending.

“It was clear in the negotiations that this would be an issue. Soldiers’ wages versus tanks,” said one EU diplomat, noting that it was up to the Commission to determine what could be exempted.

The “failure” of the Commission

The Commission has been criticized in the past for failing to enforce the deficit rules, especially in the case of France. Tougher enforcement is a key demand of Germany and others in negotiations to reform the rules.

“We will be watching very closely,” an EU ministry official said.

One possible outcome is that countries will still be placed in the EDP, but that the fiscal adjustment set by the Commission in the autumn will be smaller.

“Clear rules govern EDPs,” Dombrovskis said. “These main parameters have not changed. 3% of GDP remains the relevant threshold for the initiation of a DYE”.