The implications of the European Union’s new fiscal rules

Summary:

European Union fiscal rules set limits for the national budget deficits and public debts member countries can have, to ensure sound public finances. The rules constrain the excess of government spending over government revenues. The main rules were enshrined in the Maastricht Treaty in 1992, while detailed regulations were codified in the Stability and Growth Pact (SGP) in 1997. The SGP was subsequently revised a number of times. Then, in the wake of the COVID-19 pandemic and the subsequent energy crisis, European fiscal rules were suspended for 2020-2023 and reactivated from 2024. The European Commission began a review of the rules in 2020, though this was interrupted by the pandemic. The review restarted in October 2021 and led to an updated set of fiscal rules, which entered into force at the end of April 2024. This was an important step. The new rules determine the fiscal consolidation requirements and thus the ability of national fiscal policies to address national and European challenges. 

This Policy Brief summarises the main features of the new fiscal framework in comparison to the previous one, quantifies its fiscal adjustment implications based on the May 2024 European Commission forecasts (the latest at time of writing), and assesses briefly its merits and shortfalls. We also offer a few recommendations on how the Commission and the Council should address loose ends in the framework when it is first implemented later this year.

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