Many EU countries are running up excessive deficits. The EU wants to take action against seven of them. Fierce disputes are inevitable within the union.
The fiscal situation of some EU member states is dramatic and poses an existential threat to the monetary union. The EU Commission is therefore making another attempt to put the worst budget offenders in their place. It is launching an excessive deficit procedure against seven member states. They face fines running into billions.
The measure is sensational because it also affects the heavyweights France and Italy – they are the largest economies in the EU after Germany. Belgium, Hungary, Malta, Poland and Slovakia will also have to deal with the Commission. These states had deficits of more than 3 percent of their economic output (GDP) in 2023.
Some of them are also heavily indebted because they have been running deficits for decades and have had to cover the deficit with ever new debts. France, for example, has exceeded the 3 percent deficit limit 14 times in the past 15 years.
The political will has been lacking for decades
The fiscal problems are therefore not caused by economic factors, such as a weak economy that would lead to a drop in tax revenues. Rather, they are due to serious structural difficulties.
Countries’ spending has risen far too much over the years, and in many places there is a lack of political will to tackle this problem. As a result, Italy’s debt has risen to 137 percent of GDP, while France’s figure is 111 percent.
Since April 30, slightly adjusted rules have been in place in the EU under the so-called Monetary and Stability Pact. The long-standing thresholds remain in force. This includes the deficit limit of 3 percent. In addition, the debt of EU countries may not exceed 60 percent of GDP.
What is new, however, is that the Commission will reach an agreement with each deficit sinner on how to achieve a maximum debt of 60 percent of GDP over time. Each country must also draw up a four-year budget plan with the Commission.
The countries ignore the rules
Fiscal sloppiness should actually result in financial sanctions from the Commission. However, the Commission has never been able to enforce sanctions against the member states, and excessive deficits have always gone unpunished.
This risk remains. A heavily indebted country like France may never be subject to sanctions – simply because it is powerful France.
So far, the Commission has had no chance against even a relatively small member state like Romania. Two years ago, it recommended that the government take measures to combat the high budget deficit. But Romania has failed to do so, says EU Commissioner Valdis Dombrovskis. The Commission will therefore propose to the Council (member states) to initiate proceedings against Romania.
The next few months will show whether countries that are themselves being pilloried will take tough action against a member state. The Commission and the member states could yet clash violently on this issue.
This is especially true as the deficit procedure is a lengthy process with many intermediate steps – the EU is also a legal community. In July, for example, the Commission will propose to the finance ministers that they make recommendations on how the seven deficit sinners should tackle the deficit in their national budgets.
The outlook is bleak
There is another reason why heated debates could arise: deficits of more than 3 percent are permitted in the EU if countries temporarily spend a lot of money to achieve the union’s long-term strategic goals, such as strengthening defense or investing in green technologies.
However, there is a lot of room for discretion, particularly when it comes to investments in the ecological transition: to what extent does government spending make sense, and what part of the deficit is really due to investments and not just consumer spending? Disputes over such questions are inevitable in the EU.
Especially since it is obvious that the financial outlook is poor. The EU and its member states are facing increasing expenditure – not only for defense or the ecological transition. The increased interest that has to be paid on the debt is also costing a lot of money.
At the same time, the prospects for revenue are bleak. Countries cannot tax capital income more heavily because the owners will then leave. Higher taxes on labor income are even more inappropriate. They should be falling, not rising. In Belgium, France and Italy in particular, all of which are particularly heavily indebted, residents already pay very high income taxes.
It is therefore probably a coincidence, but significant, that the European Central Bank warned on Wednesday about the high debts of the euro countries. They will face high fiscal burdens in the coming decades, it writes. Governments should therefore strive to reduce budget deficits in order to prepare for the future.