How to Avoid Mistakes with the New EU Debt Rules


The European Union is exploring new fiscal rules as the old setup – the Stability and Growth Pact – has not been successful when it comes to promoting economic growth and ensuring countries follow the rules. The current deficit-reduction targets of 3% and public debt cap of 60% of GDP were quite literally treated as suggestions, with most countries routinely disregarding the guidelines and even suspending them during the pandemic with the European Commission’s invocation of the “general escape clause”.

The newly proposed fiscal rules framework seeks to alleviate past problems while encouraging long-term economic growth. It includes a four-year fiscal adjustment plan that allows countries to ask for more time if they can justify additional spending via viable reform and investment commitments. This shift away from strict adherence to targets is key in order to keep any potentially suffocating austerity from occurring.

International Monetary Fund and countries like Germany have advocated for some hard targets and binding rules. Here, fiscal hawks may be hesitant about granting Brussels too much power and prefer national accountability for fiscal policy. Possible solutions include independent fiscal councils or smaller fines, as well as using positive incentives like access to bond markets and encouraging investment in technology, education, and infrastructure.

Similar to the U.S.’s Inflation Reduction Act’s $369 billion of subsidies and tax credits, the EU must come up with a creative, attractive financial package if they’re to persuade companies and investors that Europe is the best place to be. This includes looking into scale-up financing, furthering the banking union, and an overall shift in the political discourse towards treating bond markets as normal, rather than a source of fear.

The European Commission, who is in charge of the legislation, aims to present a draft in the coming weeks and to have something implemented for the start of 2025. Analysts agree that legalistic grandstanding should not be part of the equation and instead, newer rules should prioritize the future and economic prosperity.