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Are the EU fiscal rules made to be broken, or just broken?

The revamped EU fiscal rules are meant to lower debt and deficit ratios over the long term. But the pressing need for public investment, as well as high and rising interest expenditure costs, will push up on these measures instead. Indeed, the fiscal rules lack credibility and are likely to be watered down again in the future.

Author
Felix Feather
Felix Feather
Economist

Duration: 1 Min

Date: Oct 09, 2024

Key Takeaways

  • The return of the EU fiscal rules has seen several European economies including France and Italy immediately fall into excessive deficit procedures. 
  • They are therefore required to reduce their structural budget deficits by 0.5 percentage points per year.
  • But we expect pressing investment needs, the delayed feed-through of higher interest service costs, and political realities will continue to push deficits higher rather than lower over the next few years.
  • Indeed, the recommendations in the Draghi report on European competitiveness point to higher investment spending and call for joint borrowing to fund this. 
  • Eventually, the complex array of exemptions that allow some high-deficit countries to sidestep the full extent of the fiscal rules will expire. At that point, the massive medium-term fiscal consolidations implied by the rules will cease to be credible. 
  • Therefore, the EU Commission will likely eventually water down the fiscal rules once again, rather than force a showdown with national governments. Changes could include more exemptions for investment spending, and slower deficit reduction.
  • Nevertheless, potential flashpoints along the way to this outcome – including the expiry of the temporary adjustment period in 2027 and an array of national-level elections – may cause market volatility akin to the run-up to the recent French legislative elections.

    Read the full article. 

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