Using the methodology of the European Commission’s reform proposal for revising the bloc’s debt and deficit rules, the economic think tank Bruegel found that the new rules would impose severe restrictions on the public budgets of several member states.
The think tank presented its conclusions before the European Parliament’s economy committee on Wednesday, September 20th, warning that the model may prove too hard to implement in France and a few other EU members, including Italy and Belgium.
“It will force France into a completely unrealistic adjustment,” Bruegel Director Jeromin Zettelmeyer, one of the study’s co-authors, told the assembled MEPs, arguing for more flexibility in the upcoming reforms.
The new fiscal rules were proposed by the Commission in April with the aim of making member states more resilient in the face of economic crises and increasing debt sustainability across the bloc.
Under the new rules, EU member states would have to submit national plans to the Commission on how to lower their deficits if their debt level surpasses the EU’s long-established debt cap 60% of their GDP, and, and Brussels’ evaluation (and approval) of their strategies would be based on a so-called debt sustainability analysis (DSA), which takes into account specific circumstances, such as inflation projections, economic cycles, and long-term costs associated with the aging population.
Fearing that the DSA system would give too much leeway for certain countries, the German government pressured Brussels into introducing certain numerical “safeguards” as well, in addition to the existing rule that government deficit cannot exceed 3% of GDP. The safeguards would state that the necessary fiscal adjustments cannot be postponed to the end of the fiscal period, and member states with “excessive” deficits would have to continuously lower their structural primary balance by at least 0.5% annually.
Bruegel’s study modeled what would happen to EU countries during a four-year adjustment period under these conditions, and found, for example, that France would need to lower its structural balance by 1.1% of its GDP annually between 2025 and 2028—meaning a tax increase of about €30 billion every single year.
The report also points out that—in the case of France—this severe adjustment was not even necessary under the initial 60% debt rule, but solely because of the safeguards added later. Therefore, Zettelmayer called for discarding the measures or at least changing them significantly and introducing certain exemptions to allow temporary increases in public spending.
Apart from France, Bruegel’s report found that Italy, Belgium, Bulgaria, Slovakia, and Slovenia would also need to considerably cut back their spending and increase their taxes if they wanted to comply with the rules, which—considering the requirements of the current green transformation and the ongoing economic slowdown across Europe—would be unrealistic to expect in the following years.
Nonetheless, the study found that, at the same time, the new rules would make fiscal adjustments easier for the majority of EU member states. The proposal is currently being debated in the European Council, where countries hope to achieve a consensus by the end of the year and make the new rules applicable as soon as 2024.
