The Polish Minister of Finance announces success in the EU Council. New principles of economic management were established

The finance ministers of 27 EU countries in the EU Council succeeded on Wednesday evening [20.12.2023] after many months of disputes, agree on the reform of the EU’s budget discipline rules. This compromise will be the basis for negotiations between the EU Council and the European Parliament, which should not bring major changes, because in this area the governments of the EU countries play the first fiddle. – This is a historic moment because we have established new principles of economic management that will ensure both stability and economic growth – said Deputy Prime Minister Nadia Calvinio, who led today’s teleconference meeting of finance ministers on behalf of the Spanish Presidency.

The reform does not change the treaty limits of 3%. GDP for the public finance deficit and 60 percent GDP for public debt, but modifies the ways in which countries with higher debt or deficit achieve these indicators. The “Polish point” of these negotiations was – also strongly promoted by France and Italy – the demand for favorable treatment of defense spending by the European Commission in its decisions to initiate the disciplinary “excessive deficit procedure”. “Defense spending will receive special treatment in the excessive deficit procedure. Success!” commented Minister Andrzej Domański via social media.

The EU’s Stability and Growth Pact, which specifies the principles of budget discipline, has so far been criticized for very severe penalties (especially for euro zone countries), which are therefore of little credibility (in fact, Brussels does not dare to impose them). And also the unrealistic goals of budget discipline, which had a pro-cyclical effect, i.e. added new savings to the poor economic climate. The EU, which was pushing a policy of sharp belt tightening (“austerity”), paid the price during the financial crisis that began in 2010. Such rules of the Pact have been suspended due to the pandemic, but theoretically they are to return at the beginning of next year. Hence the race against time to finalize the reform by early spring 2024 at the latest and not return to “austerity” when the EU needs large investments in the climate and digital transformation, as well as in its defense in the face of an aggressive Russia and uncertainty about the durability of the US security guarantees. especially after next year’s presidential elections.

Franco-German settlement

This spring, the European Commission proposed a reform that takes into account the specific conditions of specific EU countries with excessive debt or deficit. Brussels is to negotiate with these countries several-year budget programs (“adjustment”) that include structural reforms or strategic investments stimulating economic growth. – Although the EU Council negotiations have added some complexity to our project, they retain its basic elements. This means more medium-term budget planning, greater responsibility of EU countries for their budget plans within the framework of common EU rules, as well as the possibility of more gradual budget adjustment [do limitów długu i deficytu]to preserve their investment and reform commitments, said Paolo Gentiloni, EU Commissioner for Economic Affairs, today. Gentiloni is also the former prime minister of Italy, which for many years has been arguing in Brussels for the right to a more lenient path to public debt reduction that would not choke investments.

The individualization of the paths to reaching the treaty debt and deficit indicators, which are to be negotiated between Brussels and individual capitals in the Union, caused fierce opposition in Berlin. And the tedious negotiations, in which the opposing parties were led by Paris (an advocate of a high degree of individualization of budget paths) and Berlin (an advocate of firmly anchoring the reform in EU-wide and quite detailed rigors), came down to a dispute over how strongly to pack the Commission’s original project with iron-clad numerical indicators. The idea was not to allow Brussels and individual EU countries to negotiate too gentle or slow paths to healing their public finances.

French minister Bruno Le Maire met his German colleague Christian Lindner for dinner in Paris yesterday, after which the Frenchman announced their bilateral “100% agreement”. And this resulted in today’s compromise of the entire EU Council after Rome had previously been co-opted into the Franco-German version of the Stability and Growth Pact reform.

Easing the rules of the “fiscal pact”

According to today’s agreement, EU countries with a debt-to-GDP ratio exceeding 90% will have to reduce it by one percentage point annually during the adjustment period negotiated with the European Commission. In the case of countries with debt between 60 and 90 percent. GDP will only require a reduction of half a percentage point per year. Moreover, their annual deficits should remain below 1.5%. GDP.

Individual EU countries will also be able to extend their adjustment period from the standard four to seven years, referring to the investments and reforms included in their National Reconstruction Plans (KPO). This, together with an additional system of detailed indicators, means that the EU is moving away from the hard pace – which, according to critics, stifles investments and economic growth – in reducing public debt, which was imposed, among others, by the “fiscal pact” pushed through by Angela Merkel’s government over a decade ago.