EU changes rules for public debt and budget deficit. I breathe for Romania, which is in excessive deficit procedure

The EU member states, gathered in the European Council, adopted on Monday, definitively, new rules that regulate the level of public debt and the budget deficit for EU countries. It can mean a moment of respite for Romania, which is in the process of excessive deficit.

The Council adopted three legislative texts that will reform the EU’s economic and fiscal governance framework.

“The new legislation will significantly improve the existing framework and provide efficient and applicable rules for all member countries. They will ensure guaranteed and sustainable public finances, increase the focus on structural reforms and investments to stimulate growth and job creation in EU,” said the Belgian Minister of Finance, Vincent Van Peteghem (Belgium holds the EU presidency).

It was the last step necessary for the new tax rules to come into force, after last week’s vote in the European Parliament. The texts will be published tomorrow in the European Journal.

How is Romania?

The new rules keep the debt and deficit limits set out in the treaties at 60% and 3% of GDP, respectively, but give countries more room to negotiate their adjustment paths with the European Commission in four-year plans that can be expanded to seven if they adopt reforms and investments. Romania is still in the excessive deficit procedure from 2021. The EU requirement was for Romania to reach a public deficit target of 2.9% of GDP in 2024. But fiscal consolidation has been delayed due to external shocks and domestic government spending, and the deficit scheduled for this year is 5% of GDP. Only in the first three months, the state closed the deficit to no less than 2% of GDP, per execution. In fact, Romania is the only EU country in excessive deficit procedure. Ten other countries have exceeded the 3% deficit, but are not that far from the target.

The new legislation is more relaxed with the 3% limit, provided for in the EU accession treaty. Under the new rules, all member states will be required to prepare a medium-term national structural fiscal plan covering 4-5 years, depending on the length of the national legislature. In their plans, Member States commit to a multi-year trajectory of net public spending and explain how they will deliver investments and reforms that respond to the main challenges identified in the European Semester, particularly in the country-specific recommendations.

The reform updates the excessive deficit procedure. While the deficit-based excessive deficit procedure remains unchanged, the debt-based excessive deficit procedure takes into account the operation of the new multiannual framework.

When the excessive deficit procedure is opened on the basis of the deficit criterion, the net corrective expenditure path should be consistent with a minimum annual structural adjustment of at least 0.5% of GDP.

In the interim, the Commission may, in 2025, 2026 and 2027, take into account the increase in interest expenses in determining the corrective path proposed under the excessive deficit procedure.

The fine for non-compliance will be up to 0.05% of GDP and will accrue every six months until the Member State concerned takes effective action.

On the other hand, the States with a 3% deficit will have to further correct it to 1.5% in order to have a reserve to fall back on in times of crisis.

There are also rules for public debt, but they do not currently apply to Romania, which is more than 10 percentage points below the threshold of 60% of GDP, imposed by EU rules.

Under the new rules, countries that exceed the debt limit must reduce their debt by one percentage point each year when it exceeds 90% of GDP and by half a point if it does not reach that level.