New fiscal rules may require deeper-than-expected spending cuts in 2025, Eurogroup signals

Eurozone countries may have to cut net government spending by more than previously anticipated next year to comply with new EU fiscal rules, finance ministers from the 20-member states group said on Monday (15 July).

In a statement published in the evening after the Eurogroup meeting in Brussels, the ministers said applying the bloc’s revised governance framework will “lead to a contractionary fiscal stance for the euro area as a whole in 2025.”

The statement added that such a restrictive policy is “appropriate” given the need to “enhance fiscal sustainability” and help ensure a continued decline in inflationary pressures.

Monday’s document differs subtly but significantly from a previous Eurogroup statement published in March, which spoke of the need for “an overall slightly contractionary fiscal stance” across the eurozone in 2025.

Eurogroup President Paschal Donohoe said the shift is due to the fact that more member states than initially anticipated are expected to achieve fiscal compliance over a four-year rather than seven-year period.

“What simply happened between March and now is that the Commission has given their recommendations, and our assessment is that if those recommendations are implemented, which I believe they should be, it will lead to a more contractionary approach than mildly contractionary,” he said.

The European Commission announced last month that it would open so-called “excessive deficit procedures” (EDP) against Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia, whose deficits exceeded 3% of annual GDP in 2023.

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

Donohoe’s remarks were echoed by a senior EU official, who spoke on condition of anonymity.

“I think it’s fair to say that at least the adjustment needs are not smaller than they looked in March,” the official said.

“Much depends on whether countries submit requests for extension. So if the adjustment effort is distributed over seven years, then the initial effort will be smaller, and we will be closer to ‘mildly contractionary’ [next year]. Whereas if they do it in four years, then I think we can we can safely drop the word ‘mildly’.”

The EU’s new fiscal rules, which came into force in April this year, maintain the original deficit and debt thresholds of 3% and 60% of annual GDP, respectively, that were enshrined in the bloc’s Stability and Growth Pact (SGP) in the 1990s. However, they loosen the SGP’s requirement to cut national excess debt-to-GDP by 1/20th each year.

Instead, member states that contravene the two limits must follow individually tailored budgetary plans recommended by the European Commission, detailing how they can approach fiscal compliance within four years or, if debt levels are moderate and specific reforms are made, seven years.

Fiscal stance nuances

Before the meeting, Commissioner for Economy Paolo Gentiloni and German Finance Minister Christian Lindner offered subtly conflicting views about what the eventual Eurogroup statement would contain.

Gentiloni, who hails from Italy’s centre-left Democratic Party, reiterated that a “slightly contractionary fiscal stance” next year would have been “in line with our task to contribute to bringing down inflation, and also it is coherent with the fiscal rules that we are starting to implement”.

Conversely, Lindner (FDP/Renew) – a renowned fiscal hawk – dropped the “slightly” qualifier. “We support this recommendation for a restrictive fiscal policy, which also fits in with the new and tighter fiscal rules,” he said.

The comments come amid growing unease about Europe’s ability to finance critical digital and green investments, as well as more general concerns about the competitiveness of the European economy.

According to the International Monetary Fund, the eurozone is projected to grow by just 0.8% this year—less than half the average rate of advanced economies.

Fiscal support higher than justified?

Meanwhile, the Eurogroup statement comes just two weeks after the European Fiscal Board (EFB), an independent EU advisory body, urged eurozone countries to implement a “sizeable restrictive impulse” in 2025.

“Fiscal support in the euro area is set to remain substantial, well above what is justified by the macroeconomic outlook,” the EFB said, adding that eurozone countries are currently forecast to cut spending by just 0.1% of annual GDP next year.

The Board said that countries with “very high debt levels” including France, Italy, and Spain – the EU’s second-, third- and fourth-largest economies – should “make an extra effort to reduce their underlying budget deficits”.

The eurozone’s overall fiscal deficit is set to decline to 2.8% next year, down from 3.6% in 2023, according to the Commission’s most recent economic forecast.

Overall debt levels, meanwhile, are forecast to remain at last year’s level of 90% of annual GDP before inching up to 90.4% in 2025 – well above the bloc’s 60% limit.

[Edited by Anna Brunetti/Alice Taylor]

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