EU Initiates Excessive Deficit Procedures Against Seven Countries
The European Commission has initiated excessive deficit procedures against seven EU countries, including France, Italy, Belgium, Hungary, Poland, Slovakia, and Malta. This move comes as these nations have exceeded the public deficit limit set at 3% of gross domestic product (GDP) by the Stability Pact. The Commission will propose these procedures at an upcoming meeting of EU finance ministers on July 16.
Financial Sanctions and Budgetary Prudence
The Stability Pact, which limits debt to 60% of GDP, was put on hold after 2020 due to the economic crisis linked to Covid-19 and the war in Ukraine but has been reactivated this year. Countries exceeding the deficit limit will need to take corrective measures to comply with EU budgetary rules or face financial sanctions. Paolo Gentiloni, the Economy Commissioner, emphasized the need for 'budgetary prudence' in the face of geopolitical risks, stating that a return to austerity would be a 'terrible mistake.'
Country-Specific Challenges and Reforms
Italy, with the highest deficit in the EU at 7.4% of GDP, faces vulnerabilities linked to high public debt and weak productivity growth. Despite improvements in the labor market and financial sector, further reforms and investments are needed to address structural deficiencies and promote productivity growth. France, whose debt reaches 110% of GDP, has been in an excessive deficit procedure most of the time since the euro's creation but emerged from it in 2017. The far-right and left oppositions in France plan to reverse pension and labor market reforms, potentially compromising Paris' promise to get back on track in four years.
- The European Commission's reactivation of the Stability Pact underscores the importance of fiscal responsibility among EU member states. The highest deficits in the EU were recorded in Italy (7.4% of GDP), Hungary (6.7%), Romania (6.6%), France (5.5%), and Poland (5.1%).
- France has been in political turmoil since President Emmanuel Macron dissolved the National Assembly following his camp's defeat in the European elections. The political crisis, coupled with the country's high debt, has placed France under scrutiny by rating agencies.
- Italy's public debt-to-GDP ratio, although significantly declined since the peak of Covid-19, remains high at more than 137% of GDP in 2023. The European Commission has highlighted the need for Italy to maintain the pace of implementing the Pnrr and undertake further political efforts to reduce the high public debt ratio.
- The reformed Stability and Growth Pact provides a robust surveillance mechanism to address fiscal sustainability risks. By September 20, the Twenty-Seven EU countries will need to submit their multiannual budgetary plans to Brussels, which will be scrutinized by the Commission and the Council. Recommendations for restoring public accounts will be issued in November.
