Rules reviewed: EU fiscal discipline agreed — but with ‘flexibility’

With 27 member states in the EU experiencing different financial pressures, there was a wide variety of views on this most sensitive of areas, and agreement was no certainty, so it will come as a huge relief in Brussels.

That is because failure to update their fiscal rules would have hit the credibility of the EU's members on global financial markets.

Analysts could have assumed that some states struggled to comply with the SGP and were, therefore, in trouble.

First adopted in 1997, the SGP is still vital to keeping the EU's national economies aligned — especially since 20 countries share the euro as their currency.

As set out in the Maastricht Standards, the SGP seeks to harmonise EU economies to enhance its single market in a key move towards a currency union.

Yet a run of recent crises, from the 2008 financial crisis onwards, has meant that some states simply never comply with the SGP rules — and never face sanction for violations.

German frugalité

The EU's biggest economy, Germany, has been the leading voice calling for financial discipline across the bloc, unpopular in the Mediterranean, though that is.

Its central bank, the Bundesbank, was among the first to be granted independence from the government.

It knows to keep out of political controversy and not to provide direct finance to the government.

These precedents were echoed in relevant EU treaties and agreements and were instrumental in how the European Central Bank was designed as the monetary policy authority behind the euro.

Germany is also the best known of the bloc's so-called "frugal" countries, which prioritise fiscal discipline at home and across the union by adopting consistent standards to reduce excessive deficits and debt levels.

Its constitution makes specific mention of this. Article 109 (amended in 2009 by a parliamentary vote) is described as a "curb on public debt."

It has also been upheld in the courts. For example, a judge's ruling in November 2023 found that a law exceeding debt limits to replenish a special €60bn fund for climate protection and modernising the economy was unconstitutional.

French fraternité

Germany led the advocacy when EU countries agreed to the European Fiscal Compact in 2012, which includes rules for a brake on public debt.

But the agreement was delayed by opposition from within the bloc, from more heavily indebted nations in southern Europe, with objections led by France.

It took negotiators over two years to clear the impasse and direct talks between Paris and Berlin were required.

Other European capitals waited eight months to make their contribution, waiting for the agreement between the EU's big two before getting involved.

The 2012 agreement laid the foundations for the agreement on resurrecting the SGP, although it did not include the two main thresholds benchmarked to GDP (limiting budget deficits to 3% and public debt to 60%, figures enshrined in EU Treaties).

Nonetheless, it did outline rules that were less restrictive and more adapted to match individual national needs, involving adjustments over several years where necessary.

Examples could be a commitment to slimming budget deficits or debt by an agreed percentage, or keeping it at prudent levels, for four years or more.

States that reform and invest in EU priority areas — such as the environment and defence — will be allowed to extend the adaptation period to a maximum of seven years.

Historic milestone

The latest agreement provides for monitoring nation's deviations from their net expenditure paths, as required to develop an adjustment plan.

The commission will consider higher interest rates during the plan's implementation.

It will be possible to adopt "fiscal buffers" to deal with fluctuations and imbalances, always ensuring strategic spending, even in adverse circumstances.

Member states that exceed binding thresholds — or that deviate from commitments they made under medium-term adjustment programmes for excessive deficit measures — will be subject to potentially unlimited fines.

The agreement, even if it has yet to pass, amounts to a "historic milestone", according to French Finance Minister Bruno Le Maire.

It establishes a mechanism for fiscal stability and discipline, opening the way toward a single EU-wide financial authority in the future.

That could provide progress toward the regular issuance of EU-wide bonds, which would become a major international asset on global markets.

The recast SGP has a guaranteed majority to pass in the European Council and the European Parliament, consisting of liberals and a large majority of social democrats.

But there are a few social democrats who oppose it, as does the radical left and the Green Party. Some say it is a call for —and return to — austerity.

One of its opponents, European MP Aurore Lalucq, says it will hurt Europe, which needs investment, not an update to "economically ridiculous rules".

A greater risk may be that nationalists and populists exploit the pact.

To Mediterranean coast countries like France, which has not balanced its budget for almost half a century, the idea that national finance ministries can propose how to balance the books over several years is music to their ears.

Others wonder how they can introduce the enormous carbon-cutting infrastructure changes to things like energy if they have to do so under strict rules.

Still, to find a formula that all 27 felt they could sign up for in 2024 is no easy feat. Bring on the 'flex' in 2025!