The European Parliament has cleared the way for new rules for budget deficits and public debt in the EU. In Strasbourg, the majority of MPs approved a controversial compromise for the reform of the so-called Stability and Growth Pact. Accordingly, clear minimum requirements for reducing debt ratios for highly indebted countries should apply in the future. At the same time, EU targets should take greater account of the individual situation of countries.

Federal Finance Minister Christian Lindner called the decision valuable. “Europe is getting clear rules for stable public finances,” said the FDP politician. Germany’s central concern – “financial stability” – is reflected in the legal texts. “We get clear rules for debt reduction, which can then be enforced with a realistic perspective.”

In principle, under the new regulations in the EU, the debt level of a member state must not exceed 60 percent of economic output. In addition, the general government financing deficit – i.e. the gap between income and expenditure in the public budget, which is primarily covered by loans – should be kept below three percent of gross domestic product (GDP).

Protective measures are also planned

In addition, protective measures are planned: Highly indebted countries (debt levels of over 90 percent) should have to reduce their debt ratio by one percentage point annually, and countries with debt levels between 60 and 90 percent by 0.5 percentage points.

At the same time, the EU Commission responsible for supervision should be able to take the increase in interest payments into account during a transitional period when calculating adjustment efforts. If Member States submit credible reform and investment plans that improve resilience and growth potential, the period for debt reduction should also be extended.

CSU MP Markus Ferber, economic policy spokesman for the EPP group in the European Parliament, welcomed the adoption. “With the new EU debt rules, we are returning to a responsible EU budget policy.” The new set of rules creates more clarity and puts the economic and monetary union on a solid foundation.

Critics, on the other hand, always emphasized that the rules cut off necessary investments in, for example, climate protection or the social sector. An analysis by the European Trade Union Confederation (ETUC) and the New Economics Foundation (NEF) came to the conclusion at the beginning of April that if the planned rules were adhered to, only Denmark, Sweden and Ireland would be able to afford necessary expenses from 2027 onwards. It was said that investments would also be severely inhibited in Germany.

Criticism also from the Greens

The Greens also criticized the reform plans. “Instead of adding together debt sustainability, sustainable finances and sufficient space for investment in the green transformation, the new rules, despite the necessary caution when it comes to counter-financing, rely on debt reduction that does not meet the needs of this time,” said MEP Henrike Hahn after the vote.

The head of the Christian Democratic EPP group, Manfred Weber, said the Greens were playing with fire. “They have learned nothing from the euro crisis.” It is not enough to just talk pro-European in Sunday speeches; political action is crucial.

Representatives of the European Parliament and the governments of the member states agreed on the controversial compromise at the beginning of February after a long debate. After the vote in the plenary session of the European Parliament, the EU states also have to confirm the new rules. This is usually a formality and is scheduled for next week.

Critic: Current rules are too complicated

The current set of rules for monitoring and enforcing these requirements has long been viewed by critics as too complicated and too strict. That’s why it should be reformed. If the upper limits are exceeded, debt criminal proceedings, so-called deficit proceedings, can be initiated. A country must then take countermeasures to reduce debt and deficit. The main aim of this is to ensure the stability of the Eurozone.

The criminal proceedings were recently suspended due to the Corona crisis and the consequences of the Russian attack on Ukraine. In 2020 in particular, the deficits in almost all EU countries were well above the three percent mark. The deficit procedures should be able to be reopened from this spring. According to the latest data from the EU statistics office Eurostat, several countries broke the rules last year.

The agreement now reached to reform the rules dating back to the 1990s was based on proposals from the EU Commission. However, these were criticized, especially by the federal government, as being too far-reaching a weakening of the so-called Stability and Growth Pact. The governments of the EU states therefore agreed on a number of changes after months of negotiations.