European Union has finally reached a compromise on how to reform its Fiscal Rules

After months of tense negotiations, the European Union has finally reached a compromise on how to reform its fiscal rules, which were suspended during the pandemic. The new rules aim to give more flexibility and room for investment to member states, while ensuring fiscal sustainability and avoiding excessive debt.

The agreement came after a heated dispute between France and Germany, the two largest economies in the bloc, over the role of the European Commission in enforcing the rules. France wanted more discretion for the Commission to take into account the specific circumstances of each country, while Germany insisted on strict and automatic criteria to trigger corrective measures.

The compromise, which was endorsed by the finance ministers of the 27 EU countries on Tuesday, preserves the main pillars of the existing rules, such as the 3% limit on budget deficits and the 60% limit on public debt. However, it also introduces some changes, such as:

A new “investment clause” that allows countries to exclude some public spending on green and digital projects from the deficit calculation, as long as they respect the debt limit and have a clear plan to reduce their debt over time.

A new “simplification clause” that enables countries to temporarily deviate from the adjustment path towards the medium-term budgetary objective, which is a country-specific target for the structural balance that ensures fiscal sustainability. The deviation is allowed if it is justified by exceptional circumstances, such as a severe economic downturn, a natural disaster, or a health emergency.

A new “matrix” that links the required fiscal adjustment to the level of debt and the economic conditions, with more differentiation across countries and more room for judgment by the Commission. The matrix replaces the previous complex system of benchmarks and indicators that were often criticized for being too rigid and opaque.

The new rules are expected to enter into force in 2023, after the EU’s general escape clause, which was activated in March 2020 to allow massive fiscal stimulus in response to the Covid-19 crisis, is deactivated. The Commission will also review the new rules in 2024 to assess their effectiveness and propose further changes if needed.

The reform of the fiscal rules is a crucial step for the future of the European project, as it will ensure that the member states pursue sound and responsible fiscal policies that support economic stability and convergence, while also fostering social cohesion and environmental protection.

The reform will also enhance the credibility and legitimacy of the European fiscal framework, which has been often criticized for being too complex, rigid, and ineffective.

The compromise reached by the EU is not perfect, and it may not satisfy all the preferences and expectations of the different stakeholders. However, it is a balanced and realistic solution that reflects the diversity and complexity of the European reality, as well as the common interest and vision of the European family.

It is a sign of maturity and solidarity that shows that the EU is capable of overcoming its differences and finding common ground on key issues that affect its present and future.