EU Commission ups pressure on seven countries’ public spending; spares Estonia for defence investment

The European Commission issued formal warnings to seven member states for violating the bloc’s budget rules on Wednesday (19 June), piling pressure on some of the bloc’s largest economies to cut public spending, but spared Estonia thanks to its high levels of defence investment.

The EU executive announced that so-called “excessive deficit procedures” (EDP) will be initiated against Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia, whose deficits exceeded the bloc’s fiscal limit of 3% of annual GDP in 2023.

Romania, which is expected to run the bloc’s largest deficit this year and is the only EU country subject to an ongoing EDP, was found “not to have taken effective action” to improve its fiscal stance.

Economy Commissioner Paolo Gentiloni stressed that though a number of countries have breached the ceilings set in the bloc’s fiscal rules, member states’ deficits overall are on a downward trajectory, with the bloc’s average deficit set to drop from 3.5% last year to 2.9% next year.

“[This] overall picture… is one of stability and gradually decreasing deficits,” Gentiloni said. “This picture conveys a message of confidence.”

Defence exemption kicks in for Estonia but not for Poland

Notably, no EDPs were launched against Spain, Czechia, and Estonia despite their deficits being above the bloc’s 3% threshold last year.

Gentiloni explained that Spain and Czechia’s contraventions were “temporary”, while there are “overall mitigating relevant factors” for Estonia, whose considerable defence spending played a key role in the Commission’s assessment of its fiscal position.

Under the EU’s new fiscal rules – which came into force this April – defence investment is one of the areas the EU executive can look at when assessing whether a country’s excessive deficit or debt levels should translate into a formal correction procedure.

Tallinn’s government has been one of the first in the EU to speak in favour of more robust investment into defence and to step up its support to Ukraine following Russia’s invasion of the country in February 2022.

Estonia is now projected to invest the equivalent of 3.5% of its GDP into defence assets and projects in 2024 – making it the second highest spender in the EU after Poland.

The head of the Estonian Defence Forces said earlier this week Tallinn aims to reach an even higher target of 5% GDP spending in the coming years, and is now pushing for all member states to invest at least 3% of their GDP in defence.

Estonia is also currently the main backer of a €100 billion fund to support Kyiv militarily – which could be funded though jointly-issued eurobonds.

Meanwhile, Poland, which borders Belarus, Russia’s exclave of Kaliningrad, and Ukraine itself, has also doubled down on defence spending and is expected to be the highest military spender in NATO in 2024, even ahead of the United States.

Notably however, the Commission did not spare Poland from the EDP recommendation as it found that, unlike in Estonia’s case, Warsaw’s defence spending was not reflecting an equally high level of investment in areas other than personnel.

Spending data also also takes into account money that goes into military and civilian staff for defence purposes, as well as training of Ukrainians armed forces, and buying on behalf of Ukraine.

Poland has ramped up its military headcount from 176,000 people in 2022 to an expected 216,100 people in 2024, in what is often billed as Europe’s future largest army.

The next steps

Under EU law, EDPs can be launched if a country’s deficit exceeds 3% of annual GDP or if its debt-to-GDP ratio is above 60% of annual GDP and is not decreasing at a satisfactory pace.

Member states are now expected to provide “medium-term” fiscal plans by 20 September, detailing how they hope to achieve fiscal compliance. Eurozone countries that refuse to comply can be fined up to 0.05% of annual GDP every six months.

Meanwhile, the Commission will submit formal recommendations in July, which will then be reviewed by the bloc’s 27 finance ministers for a final decision by November.

The EU’s new fiscal rules amend those enshrined in the bloc’s Stability and Growth Pact (SGP) in the 1990s.

They maintain the SGP’s original deficit and debt thresholds of 3% and 60% of annual GDP, respectively, but loosen the SGP’s requirement to cut national excess debt-to-GDP by 1/20th each year.

Nevertheless, the new rules include numerical benchmarks that all member states must adhere to.

Countries with debt-to-GDP ratios above 90% must reduce their deficit by one percentage point annually on average, while those with debt levels between 60% and 90% of annual GDP must cut their debt ratios by 0.5 percentage points on average each year.

The SGP was suspended in 2020 to allow for higher deficit spending during the COVID-19 pandemic. The suspension was later extended to 2024 after Russia’s invasion of Ukraine sent energy prices soaring across the EU.

Additional reporting by Aurelie Pugnet, Anna Brunetti

[Edited by Anna Brunetti/Zoran Radosavljevic]

Read more with Euractiv