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Eleven EU countries including France and Italy are set to be reprimanded by the European Commission over excessive government spending once new fiscal rules enter into force this year.
These countries last year ran budget deficits larger than the 3 per cent of GDP threshold allowed under EU rules. The commission will determine in June whether to launch so-called excessive deficit procedures (EDP) in each case. Countries in the eurozone could face fines if they don’t course-correct, while the non-euro countries face reputational risks.
France, Italy and Belgium, whose deficits are in excess of 3 per cent and do not plan to return to compliance over the next few years, are almost guaranteed to be sanctioned.
These fiscal rules were suspended during the Covid-19 pandemic and are now being reapplied after being reformed, including clauses giving more leeway for defence investments.
The new rules have been given extra bite by the European Central Bank, which said it could exclude countries from its new but untested bond-buying programme if they do not act on EDP recommendations.
Some countries, including Spain and the Czech Republic, argue their deficit will return at or under 3 per cent this year, and should not be punished for a temporary breach.
“There may be borderline cases,” Valdis Dombrovskis, the commission’s executive vice-president for economic affairs, told the Financial Times. “If there is a country whose excessive deficit is close to 3 per cent but temporary we might decide not to use the excessive deficit procedure. The 2024 budget can come into play.”
Non-eurozone member Romania is currently the only country in an EDP.
Poland and Romania, as well as eurozone member Slovakia are pushing for an exemption on the grounds that military spending caused by Russia’s full-scale invasion of Ukraine has pushed them above the threshold.
“Poland has the highest defence spending among Nato countries, higher than the US. This is an extraordinary situation that should be considered when assessing excessive deficit procedure and the new EU fiscal rules are made for that,” Andrzej Domański, Polish minister of finance, told the Financial Times.
Poland ran a deficit above 5 per cent in 2023, and spent 3.9 per cent of its gross domestic product on defence in the same year, meaning its non-defence related deficit was below the 3 per cent threshold.
“We have been in dialogue with the commission and there is a broad understanding that such investments need to be properly taken into account,” Domański said.
Defence spending “is one of the relevant factors” determining whether or not to open an excessive deficit procedure, Dombrovskis said.
But not all defence spending qualifies for lenient treatment. Under reformed EU budget rules, “the increase of government investment in defence” can be discounted, but not recurrent defence spending.
“In the negotiations it was clear this would be a topic. Soldiers’ salaries versus tanks,” said an EU diplomat, noting that it was up to the commission to establish what could be exempt.
The commission in the past came under criticism for failing to enforce the deficit rules, especially in the case of France. Stricter enforcement was a key demand of Germany and others during negotiations on reforming the rules.
“We will be watching quite closely,” said one EU ministry official.
One likely outcome is that the countries will still be placed in EDP, but that the budgetary adjustment the commission will prescribe in autumn will be smaller.
“Clear rules govern the EDPs,” said Dombrovskis. “These main parameters have not been changed. Three per cent of GDP remains the relevant threshold for starting an EDP.”
Additional reporting by Martin Arnold in Frankfurt