EU public deficits: tighten our belts in 2024?

New EU guidelines leave behind the fiscal loosening adopted during the pandemic and raise the spectre of austerity policies.

In March 2020, the EU temporarily suspended fiscal rules under the Stability and Growth Pact to allow countries to increase public spending to cope with the impact of the pandemic. This meant freezing the 3% and 60% of GDP limits for deficits and debt, respectively.

The European Commission has decided to extend the suspension of these fiscal rules until the end of 2023 because of the impact of the conflict in Ukraine: “The extension of the general escape clause until 2023 recognises the high uncertainty and high risks in a situation in which the state of the European economy has not normalised,” explained the European commissioner for economic affairs, Paolo Gentiloni.

Even so, he wants them to be reactivated in 2024. He has already drafted new fiscal rules, incorporating some elements of a new framework on which the European Commission is working and which is expected to enter into force in 2025.

Brussels will give states more leeway

The EU is relaxing the rules of the game to make it easier for states to balance their books by avoiding a repeat of the indiscriminate cuts as a result of the aggressive austerity policies adopted after the 2008 crisis, which brought misery to the population and caused a rift between indebted southern countries and their northern partners.

However, Brussels has taken into account the sensitivities of countries such as Germany that want to ensure compliance with the rules and clearly delimit deficit limits. In this sense, it will include sanctions in the event of non-compliance and proposes an annual reduction of 0.5 per cent of public debt for states that exceed the agreed limit.

The Commission is also taking precautions by shifting responsibility for financial commitments to the states, which will have to present their four-year plans and take responsibility for future cuts without being able to point the finger at Brussels. “The new proposals give member states more flexibility to design their fiscal paths, but in return, they will have to be more credibly accountable,” Gentiloni said.

European trade unions criticise the proposal

The European Trade Union Confederation (ETUC) argues that these measures will signify: “more poverty, fewer jobs and lower wages,” warned Esther Lynch, ETUC general secretary. The organisation warns that 10 member states, including Spain, have a deficit of more than 3%, and will have to adopt spending cuts next year, running the risk of opening the way back to austerity.

The body has calculated that Brussels’ legislative proposal would force member states with a deficit above the 3% limit to cut public spending by €45 billion by 2024 or raise taxes by the same amount. In addition, it says this would result in these states being unable to meet EU targets for investment in the green and digital economy.

In this context, the organisation calls for the continuation of the European recovery funds, introduced during the pandemic as a solidarity mechanism to ensure a level playing field in investment between member states. Similarly, they propose “a fair corporate tax regime that can finance a minimum level of state investments in national budgets”, avoiding granting public funds to companies that engage in tax evasion.

The mistrust of trade unions and some countries over the decisions of the European executive is not new, but fully justified in view of previous actions in the face of debt crises. It remains to be seen how the new fiscal rules will be applied. For the time being, Brussels has already asked Spain to limit its public spending plans by 2024 in order to stick to the upcoming fiscal adjustments.