Effectively suspended since the onset of the Covid pandemic, the EU fiscal rules were set to make a comeback in 2024. At the same time, the EU was pushing for a major and swift overhaul of its fiscal framework. This column describes how, caught between freedom and responsibility of the transition phase, countries with a less virtuous track record under the EU’s fiscal framework opted for further fiscal loosening rather than reducing imbalances. Deviations from the old rules remained inconsequential, setting a more challenging stage for the implementation of the new ones.
In 2024, EU fiscal policies were suspended between two worlds: the old and the new Stability and Growth Pact (SGP) – the EU’s commonly agreed set of fiscal rules. At the end of 2023, when EU legislators finally reached a political agreement on a major overhaul of the common fiscal framework, the deal involved a commitment to an on-the-fly transition: national budgets for 2025 would be planned under the new rules, when member states were still meant to follow recommendations for 2024 issued under the old rules less than six months earlier. In simpler terms, as all eyes were moving to the roll-out of the reformed framework, the requirements under the ‘old’ rules faded from the spotlight.
Like all major transitions, the switch between surveillance regimes entailed a combination of freedom and responsibility. What would governments do in a situation where the old regime was de facto being pushed aside, while the credibility and effectiveness of the new would still have to be established? Would they keep the course towards sustainable public finances, or would they try to loosen the reigns of fiscal policy? This contribution takes a close look at fiscal policies in 2024. It starts with a short review of the policy guidance the EU issued for its member states in spring 2023 for 2024, moves to a detailed analysis of fiscal developments in 2024, and offers a brief evaluation of whether and how the EU held governments to account for what they did or did not do during the transition. A short spoiler right at the beginning: several countries took advantage of the ambiguity ensuing from the overlap of phasing out old and phasing in new rules. The resulting looser fiscal stance left an onerous legacy for the implementation of the new EU fiscal rules.
Announcing the end of an extended hiatus while pushing for new rules
In 2023, more than three years after the EU fiscal rules had effectively been suspended in the wake of the Covid pandemic, the European Commission envisaged returning to ‘normality’. On 24 May it announced the de-activation of the severe economic downturn clause by the end of the year and defined quantitative guideposts for national fiscal policies in 2024. An alternative course of action would have been difficult to justify under the then still prevailing rules. With the support of the Council, the Commission had already stretched the interpretation of the severe economic downturn clause to the maximum. As its title suggests, the clause was formally meant to offer flexibility in the event of negative economic growth in the EU or the euro area as a whole. However, that condition was only met in 2020 and by early 2022 economic activity in the EU and the EU had already returned to per-crisis levels – the threshold the Commission had set for itself to revert to a normal application of the rules (EFB 2024).
The prospective de-activation of the clause was announced amidst an improved macroeconomic and fiscal outlook: real GDP growth was moderate but expected to exceed available estimates of potential, unemployment was firmly on a downward path approaching historical lows, and fiscal positions (both budget and debt ratios) were projected to improve at unchanged policies in most countries. In its guidance to member states issued in June 2023, the Commission tried to pre-empt some elements of the SGP reform proposal it had tabled less than a month earlier. Instead of expressing adjustment requirements as improvements of the structural budget balance – as was the case under the old rules – it recommended country-specific caps on expenditure growth, the preferred and sole measure under the reform. However, at that moment member states were not ready for an innovation that was still being negotiated, and the Council insisted on an amendment to the Commission guidance which, on average, would ask national authorities to deliver an improvement of their budget balance of 0.5% of GDP in structural terms, the benchmark under the old SGP.
Towards the end of 2023, following long and difficult negotiations, the EU legislators finally reached an agreement on how to overhaul the EU fiscal framework and, in parallel, decided to move to the new set of rules as quickly as possible. The reformed pieces of EU legislation, which entered into force in April 2024, encompassed specific transition provisions, whereby national medium-term fiscal structural plans (MTFSPs) would be prepared in the course of 2024 so as to run national fiscal polices on the basis of the new fiscal rules as of 2025.
Guiding national fiscal policies while rolling out a major overhaul of EU fiscal rules
From today’s perspective, it is quite clear that 2024 was a year of fiscal indulgence in the EU. Government expenditure accelerated markedly in a context where inflation had embarked on a firm downward path – in the euro area it dropped to 2.4 %, down from more than 5% in 2023 and more than 8% in 2022 – and indexation rules should have produced a clear calming effect.
Figure 1 offers an aggregate view of relevant trends through the lens of the compliance tracker of the EFB Secretariat. Countries are grouped by the Commission’s assessment of medium-term sustainability risks (European Commission 2025). What catches the eye is the significant drop for countries where risks are considered to be on the high side (red group in Figure 1). Most of them have debt ratios of more than 90% of GDP. After a gradual and encouraging recovery from the evident low in 2020, their rate of compliance with SGP rules dropped again sharply in 2024 from around 50% to 30% – well below the average of the period covered by the compliance tracker.
Figure 1 Average compliance with all SGP rules by medium-term sustainability risks, EU27 member states
Notes: Low, medium and high medium-term sustainability risk classification as per the Commission Debt Sustainability monitor 2024. Average compliance calculated across the four rules of the pre-2025 Stability and Growth Pact (SGP). In a given year, the average compliance score measures the share of countries in compliance with the four rules of the pre-2025 SGP. More details on the Compliance Tracker are available at: Compliance Tracker – European Commission
Source: European Commission, EFB Secretariat.
A more detailed analysis of the compliance database reveals the main driver of this unfortunate development (Figure 2). Compared to 2023, countries assessed to face medium or high sustainability risks in the medium term loosened their reigns on net expenditure growth (net of discretionary revenue measures). More specifically, they did not consistently keep expenditure growth at or below available proxies of their sustainable revenue base, i.e. medium-term rates of potential output growth. In percent of GDP, the average deviation from a sustainable expenditure path turned negative when the estimate of the benchmark rate of potential output growth actually increased.
Figure 2 Compliance with the SGP’s expenditure benchmark by medium-term sustainability risks, EU27 member states
A) Average compliance score
B) Average deviation in % of GDP
Notes: See legend and notes to Figure 1.
What makes this development indeed unfortunate are the implications for the reformed fiscal rules. A cynical interpretation would be that some countries took advantage of the changeover to increase expenditure beyond sound levels because of the directional focus of the new rules: compared to the old SGP, the level of the deficit and the debt play less of a role under the new framework, as long as plans show a plausibly declining path of the debt-to-GDP ratio going forward. In other words, 2024 looks a bit like a year of ‘binging’ ahead of an announced period of ‘abstinence’. A less cynical, but still unfortunate explanation would involve a host of country-specific events such as elections, government crises and other occurrences that may typically go along with a less firm grip on government expenditure.
Conclusions
Regardless of the underlying reasons, the fiscal loosening in several member states in 2024 sets a more difficult stage for the implementation of the revamped EU fiscal framework, which the Commission dubbed as the result of “the most ambitious and comprehensive reform of the EU’s economic governance rules since the aftermath of the economic and financial crisis”. 1 The prospective effectiveness of the new framework has largely been predicated on the promise or expectation of stronger national ownership. The freedom and responsibility member states enjoyed in 2024 to implement their fiscal policies may have been very specific, but it certainly entails a steeper curve for some member states to prove they are ready for more national ownership.
Source : VOXeu
