THE provisional political agreement reached on 10 February between the member states and the European Parliament was approved today by MEPs. Specifically, the preventive part of the economic governance framework was approved with 367 votes in favor, 161 against and 69 abstentions. The regulation for the corrective part was approved with 368 votes in favor, 166 against and 64 abstentions. The directive on the requirements for the budgetary frameworks of the Member States was adopted 359 votes in favor, 166 against and 61 abstentions.

The Finance Commissioner, Paolo Gentiloni welcomed the approval of the reform of EU financial rules by the European Parliament, saying “it’s a very important time for our economy.” He admitted that the reform approved today is “not perfect”, but it is a “compromise”, which nevertheless it is “undoubtedly better” because it modernizes the rules of the Stability Pact which were created in the late 1990s. “Our goal was to fix the rigid rules that were often not enforced. And we achieved this goal,” he emphasized. As he explained, reforming the rules is better for four main reasons: firstly, because it strengthens incentives for public investment in the green and digital transition and in defence, as well as for reforms. Second, because it lays out a credible path to the required debt reduction. Thirdly, because it ensures that Member States will have ownership of their fiscal policies, in a common European framework and fourthly, there is a greater emphasis on social aspects and climate crises.

P. Gentiloni recalled that the reform of fiscal rules emerged after four unprecedented years for the EU economywith the financial crisis at the beginning of the pandemic, the recovery that followed thanks to “SURE” and the Recovery Fund, and the sharp economic slowdown again caused by Russia’s war against Ukraine. Throughout this period the general clause escape route, giving Member States the leeway they needed to respond to these shocks. “We have now turned the page and are ready to open a new chapter for economic governance in the EU – a chapter that I am convinced will allow us to face our current and future challenges,” said the Economy Commissioner. According to him, the new rules are more flexible, focus more on development and are more reliable in their implementation.

The adoption of the reform of the EU’s financial rules, following today’s EP vote, paves the way for the EU Council to give the final green light in the coming days. This will allow the submission of the first round of medium-term fiscal structural plans already this year.

Fiscal rules more flexible and investment friendly

The revision of EU financial rules approved today by the European Parliament makes them “more clearmore investment-friendly, better adapted to the situation of each country and more flexible”, the EP statement emphasizes.

As noted, MEPs significantly strengthened the rules to protect the capacity of governments to proceed with investments. It will now be more difficult for the Commission to place a Member State in an excessive deficit procedure if the necessary investments continue. In addition, all national costs for co-financing European programs will be excluded from the government’s expenditure calculation, creating more incentives.

The EP emphasizes that the new rules are much more reliable, meaning that deficit and debt reduction mechanisms will be implemented. Under the new rules, over-indebted countries will have to reduce it by an average of 1% per year if their debt exceeds 90% of GDP and by an average of 0.5% per year if the debt is between 60% and 90%. If a country’s deficit exceeds 3% of GDP, it should be reduced during periods of growth to reach 1.5% and create spending room for difficult economic conditions.

Furthermore, with the new rules greater fiscal space is ensured and specifically based on the provisions which provide greater leeway for governments, for example giving three extra years if needed (beyond the current four) to achieve the national plan’s goals. MEPs ensured that this additional time can be granted for any reason the Council deems appropriate, and not just if certain criteria are met, as originally proposed.

MEPs also insisted that countries with excessive deficit or debt can request a discussion procedure with the Commission before they are provided with guidance on their spending path. This will give a government more opportunity to make its case, particularly at this critical point in the process. A Member State may request the submission of a revised national plan if there are objective circumstances preventing its implementation, for example a change of government.

The EP has helped to significantly strengthen the role of national independent fiscal institutions (who deal with checking the adequacy of their government’s budgets and preparing fiscal forecasts), with the aim of helping to further strengthen the national sense of responsibility for the plans.

The rapporteur of the report on fiscal governance, Markus Ferber (EPP, Germany), said: “This reform is a new beginning and a return to fiscal responsibility. The new framework will be simpler, more predictable and more realistic. However, the new rules can only be successful if they are properly implemented by the Commission.”

From her side, Socialist rapporteur Margarita Marques (Portugal) said: “These rules provide more scope for investment, flexibility for Member States to smooth their adjustments and, for the first time, ensure a real social dimension. The exemption of co-financing from the spending rule will allow for a new and innovative policy in the EU. We now need a permanent investment tool at European level to complement these rules.”

The Council must now formally approve the rules as well. Once approved, they will enter into force 20 days after their publication in the EU Journal.

Member States will have to submit their first national plans by 20 September 2024. All countries will submit medium-term plans outlining their spending targets and how investments and reforms will be carried out. Member States with high levels of deficit or debt will receive advance guidance on their spending targets. To ensure the sustainability of spending, numerical benchmarks were set for countries with excessive debt or deficit. The rules will also focus on promoting public investment in priority areas. Finally, the system will be more tailored to each country on a case-by-case basis rather than applying a one-size-fits-all approach, and will better take social concerns into account.