The EU's fiscal rules were recently reformed due to significant shortcomings in the previous fiscal framework. Now it seems very uncertain whether the new framework provides decisive help in tackling the challenges.
Author
Matthias Strifler
Senior Economist, PhD
Monitoring and Oversight
The reform of the EU fiscal rules had five key objectives:
improving debt sustainability
simplifying the fiscal framework
strengthening the commitment to the framework
promoting a counter-cyclical fiscal policy, and
supporting public investments.
To gain a better understanding of the new rules, it is worth considering whether they mark an improvement over the previous fiscal framework. There is no clear-cut answer to this, but I have compiled the assessments of the NAOF’s fiscal policy monitoring function in the table below.
| Objectives of the reform | Do the new rules mark an improvement over the previous framework? |
| Improving debt sustainability | Yes: debt sustainability analysis (DSA), Member State-specific approach, longer time horizon No: incentives remain unchanged, moral hazard, uncertainty of assumptions |
| Simplifying the framework | Yes: only two indicators to be followed No: complexity of the debt sustainability analysis, multi-stage nature of the framework, excessive flexibility in the preparation of the plan |
| Strengthening commitment | Yes: the indicator to monitor compliance with the debt rule is better under the Government’s control No: still ambiguity, debt sustainability analysis opaque to decision-makers |
| Promoting a counter-cyclical fiscal policy | Yes: the indicator to monitor compliance with the debt rule and the time horizon support counter-cyclicality more clearly No: the role of safeguards, the pro-cyclical nature of the debt-to-GDP ratio |
| Supporting public investments | Yes: reforms and investments make it possible to obtain an extension of the adjustment period No: in the debt sustainability analysis, investments are not considered to increase the economy’s potential output |
Good tool but insufficient incentives
Improving debt sustainability can be considered the main objective of the fiscal framework. The reform integrates a useful tool into the fiscal framework: the Member State-specific debt sustainability analysis (DSA), which shifts the focus to the longer term. This can be seen as a clear step in the right direction.
On the other hand, the incentives of the EU Member States to comply with the rules have not changed substantially, and the risk of moral hazard remains strong. In addition, the assumptions underlying the debt sustainability analysis (interest rate development, inflation, GDP growth, etc.) are highly uncertain and drive the results of the analysis. There is also a risk that Member States or the European Commission have too much flexibility regarding the underlying assumptions of the debt sustainability analysis. This means that although the link between the fiscal framework and debt sustainability has clearly improved, the practical impacts may be very limited.
Simplifying the framework is another important objective. The reform reduces the number of indicators to be followed, making it easier to monitor compliance with the rules. On the other hand, the complexity of the debt sustainability analysis, the multi-stage nature of the framework and the flexibility allowed in the preparation of the medium-term plan do not serve the goal of simplification at all. Thus, the goal of simplification was not met as clearly as hoped.
Good intentions – but many challenges remain
The development of the indicator to monitor compliance with the debt rule is now more firmly under the Government’s control than before. This increases the chances of complying with the rules and may strengthen commitment to the framework.
On the other hand, there is still a lot of ambiguity (for example in the preparation of the medium-term plan), and the debt sustainability analysis is a rather opaque tool. These factors may undermine compliance with the framework. Although monitoring compliance with the indicators is easier, strengthening commitment risks falling short if it remains unclear where the adjustment requirements come from and how the indicators are calculated.
Promoting the counter-cyclicality of fiscal policy is an important objective. While the new net expenditure indicator and the longer time horizon support counter-cyclicality, the role of safeguards (read more about this in a previous blog post) and the pro-cyclicality of the debt ratio do not. As GDP contracts, the debt-to-GDP ratio increases automatically, which may lead to an overly strict adjustment requirement at the wrong time.
Supporting investments can also be considered one of the objectives. It is good that reforms and investments make it possible to obtain an extension of the adjustment period, but on the other hand, the impact of investments on the economy’s potential output is not taken into account in the debt sustainability analysis.
So, will the objectives of the rule reform be achieved or not? The honest answer is yes, no, and time will tell. But the fact that it is impossible to give a simple answer is already a strong message, and that, in turn, is not the best starting point for promoting the sustainability of public finances.
The fiscal policy monitoring function of the National Audit Office organised a seminar on the EU fiscal policy rules on 13 February 2025. You can also read an overview of the seminar and a blog post that explains the logic behind the new framework.
