As the European Union faces mounting economic challenges, the European Commission has stepped up its scrutiny of member states’ fiscal health. This week, Brussels assessed the multiannual spending plans submitted by 21 EU countries, evaluating their compliance with EU fiscal rules. These rules aim to ensure that countries maintain sustainable public finances, crucial for the stability of the eurozone and the broader EU economy.
The Commission has given a passing grade to most countries, but several EU states are still struggling to align with the fiscal criteria, which set a 3% limit on budget deficits and a 60% cap on government debt as a percentage of GDP. So, what does this mean for these countries’ economic futures? Let’s dive into how countries are performing in their fiscal reviews and what’s at stake.
Which Countries Passed the Fiscal Health Check?
The European Commission’s review of multiannual spending plans for 2024–2027 covered 21 countries, with 20 receiving a thumbs-up. The successful candidates include:
- Croatia
- Cyprus
- Czech Republic
- Denmark
- Estonia
- Finland
- France
- Greece
- Ireland
- Italy
- Latvia
- Luxembourg
- Malta
- Poland
- Portugal
- Romania
- Slovakia
- Slovenia
- Spain
- Sweden
However, the Netherlands failed its review. The country will now need to submit a revised spending plan that aligns with earlier fiscal projections. This rejection marks another challenge for a country traditionally known for its strong fiscal discipline.
Countries Under Scrutiny for Fiscal Non-Compliance
While most countries passed the Commission’s review, some were found lacking in certain areas:
- Estonia, Germany, Finland, Luxembourg, Malta, and Portugal were flagged as “not fully in line” with the EU’s fiscal rules.
- Lithuania was warned it could soon join the list of countries out of compliance.
- The Netherlands was directly flagged as “not in line” with the rules.
One of the countries facing the most significant scrutiny is Germany, Europe’s economic powerhouse. Despite its traditional role in advocating for strict fiscal discipline, Germany is expected to surpass the EU’s expenditure limits in the near future.
The Challenges for Eurozone Countries
The eurozone, which consists of 20 EU member states, has seen mixed results when it comes to fiscal discipline. Eurozone countries are required to submit their annual draft budgets to the European Commission by October 15, although this year, some flexibility was granted due to the introduction of new fiscal rules.
The Commission’s assessment for 2025 highlighted that eight EU member states were fully compliant with budget rules. These countries include Croatia, Cyprus, France, Greece, Italy, Latvia, Slovakia, and Slovenia.
On the other hand, six EU countries were considered “not fully in line”— including Estonia, Germany, Finland, Luxembourg, Malta, and Portugal.
The Issue of Excessive Deficits and Debt
Countries exceeding budget deficits face the risk of being placed under an excessive deficit procedure. This involves a close monitoring process and potential financial penalties if they fail to get back on track. Currently, eight countries—France, Belgium, Hungary, Italy, Malta, Poland, Romania, and Slovakia—are under this procedure.
France, in particular, stands out with a public deficit projected to reach 6.2% of its GDP for 2024, far exceeding the EU’s 3% cap. This deficit is one of the highest in the EU, second only to Romania. As a result, the Commission has raised concerns about France’s fiscal sustainability.
What Happens If Countries Don’t Comply with Fiscal Rules?
The Stability and Growth Pact, which governs fiscal rules in the EU, aims to keep public finances under control. Countries that breach the rules are expected to take corrective measures, but there are penalties for persistent non-compliance. The Commission can impose financial sanctions on states that fail to correct their deficits. However, these penalties have historically been avoided due to their political sensitivity.
This situation may be changing. With the introduction of revised fiscal rules in 2024, the EU has made the penalties more flexible and easier to enforce. This change could signal a shift towards stricter enforcement of fiscal rules in the coming years.
Why Are Some Countries Struggling with Fiscal Discipline?
Several factors contribute to the fiscal struggles of some EU countries, particularly the aforementioned richer countries like Germany and the Netherlands. The economic fallout from the Covid-19 pandemic, coupled with the war in Ukraine, has led to an increase in government spending across the board.
Despite traditionally maintaining balanced budgets, Germany and the Netherlands are facing difficulties in keeping their expenditures in check. The economic slowdown and inflationary pressures have forced many governments to inject more money into their economies.
Additionally, the rising costs of energy, particularly in light of the Ukraine conflict, have put pressure on governments to subsidise energy prices and assist citizens and businesses.
A New Fiscal Rulebook: Is Flexibility the Key?
In 2024, the EU introduced a revamped Stability and Growth Pact. This overhaul aims to offer more flexibility while still ensuring sustainable public finances. The changes include:
- Tailored budgetary paths for each country
- Increased flexibility for investment-focused expenditure
- Longer adjustment periods (up to 7 years) for countries making reform pledges
Countries like France, Finland, Spain, Italy, and Romania have already secured these longer adjustment periods to better manage their finances.
The Road Ahead: Fiscal Reform and the EU’s Economic Stability
The Commission’s fiscal assessments for 2024 represent a crucial moment in the EU’s efforts to maintain economic stability. As the world continues to grapple with challenges like inflation and global instability, the ability of EU countries to manage their finances will determine the success of the region’s economic recovery.
In conclusion, while many countries passed the European Commission’s fiscal health check, several need to make serious adjustments to avoid penalties and remain within the EU’s fiscal rules. With the revised fiscal rules offering more flexibility, it remains to be seen how effectively countries will align their budgets with these new guidelines.
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