Greece achieved a significant success in Ecofin, as the 27 EU finance ministers agreed to exempt defense spending from the deficit and the “guarantees” of reducing the public debt.
In the framework of today’s agreement, the main priorities set by the Greek government were satisfied, regarding the special treatment of defense expenditures, the special provision for the interest of the Greek public debt in 2033, the protection of investments and the gradual reduction of the public debt, so as not to undermine development and social cohesion.
At today’s meeting, Greece was represented by Minister of National Economy and Finance Kostis Hatzidakis.
Hatzidaki’s statements
Mr. Hatzidakis said in this regard: “A long European negotiation was successfully concluded today for Greece. A long-standing request by successive Greek governments to exclude defense investments from the calculation of the excessive deficit is being accepted for the first time.
At the same time, an explicit reference is made in a positive way to the issue that will arise in 2033 in relation to the calculation of interest on official sector loans in the Greek public debt, thus freeing the country from a headache in terms of EU fiscal rules.
The goal of Greece
Greece’s goal in these negotiations was to ensure the maximum possible combination of fiscal stability and economic growth policies. However, our firm commitment was and remains an economic policy that leaves behind the past decade but lays the foundations for a Greek economy that will continue to pleasantly surprise by combining strong fiscal foundations with the country’s rapid development.”
The main objectives of the new framework are:
On the one hand, ensuring the fiscal stability and sustainability of the public debt, and
On the other hand, the achievement of high economic growth rates for the coming years.
These goals are interrelated and complementary. High rates of economic growth are not possible without fiscal stability, and public debt sustainability is not possible without adequate economic growth.
It is important to emphasize that the positions and aspirations of the Greek government have been adequately covered as, among other things:
First, Greece’s standing request for special treatment of defense spending is satisfied. In particular, it is provided that if a member state has higher investments in defense than the European average, or makes a significant increase in its investments in defense, the possibility is introduced that these expenses are not taken into account for the inclusion or non-integration of the state member in Excessive Deficit Procedure.
Defense investment is the only category of expenditure for which this provision is expressly introduced.
Second, the reduction of public debt will be gradual, in order to protect the dynamics of the recovery of the European economy. With the existing rules, each member state that has a debt of more than 60% of GDP is obliged to reduce its debt by 1/20 of the excess amount every year.
In practice, this for Greece means an annual debt reduction of 4.5%-5% in the coming years. With the new rules, the required debt reduction will be calculated based on the characteristics of each member state, while the minimum threshold for states with high debt (>90% of GDP) such as Greece is the annual average debt reduction of 1%.
Thirdly, it is ensured that the integration of the interest on official loans in the public debt, which is planned for 2033, will not be taken into account in the calculations of the evolution of the Greek public debt regarding the application of the new fiscal rules.
In addition, the following were agreed with the new economic governance framework:
- National fiscal policies will be designed with greater emphasis on the particular characteristics of national economies.
- Investments that contribute to the development and adaptation of economies to modern conditions are protected.
- Common safeguards are introduced that will ensure fiscal stability, as will be pursued by national plans of four years duration, with the possibility of extension up to seven years.
- The possibility of dealing with unforeseen situations is strengthened, at the Union or national level by activating escape clauses.
- The financial governance system is simplified and streamlined to make it more efficient, transparent and fair.
What does the new fiscal rules framework provide?
In more detail, the new framework of fiscal rules provides for the following:
First, the basic projections for the fiscal deficit (3% of GDP) and public debt (60% of GDP) remain unchanged, but there are significant changes in the way national governments’ compliance with fiscal rules is monitored (the so-called “preventive arm”) but also in the way in which the so-called Excessive Deficit Procedure is activated and will operate – i.e. joining a “surveillance regime” (the so-called “corrective arm”).
Particularly:
1) Special treatment of defense investments
At the request of several member states, among which Greece was prominent, the new fiscal rules provide that when deficit and debt limits are exceeded, it will be taken into account whether it is due to high spending on defense investment.
This practically means that if a member state has higher investments in defense than the European average, or makes a significant increase in its investments in defense, it is possible that these costs are not taken into account for its accession or not Member State in Excessive Deficit Procedure.
Thus, defense investments can for the first time function as a category of expenditure that will be excluded from the calculation of the (excessive) deficit. Defense investment is the only category of expenditure for which this provision is expressly introduced.
2) Gradual reduction of deficits and debt
With the new rules, the required debt reduction will be calculated based on the characteristics of each member state, while the minimum threshold for states with high debt (>90% of GDP) such as Greece is the annual average debt reduction of 1%.
It is noted that in the last three years (2021-2023) Greece is reducing the debt-to-GDP ratio by more than ten points per year. For states with debt between 60% and 90% the minimum average required reduction rate is 0.5%.
With the abolition of the 1/20 rule, the requirements to limit the public debt in the next few years will therefore be significantly reduced.
In addition, the new fiscal rules reduce the minimum requirements for limiting fiscal deficits.
In particular, both the existing and the new rules provide that states should generally set fiscal deficit targets that are more ambitious than the 3% ceiling set by the Treaty.
Their purpose is to ensure that even in times of economic crisis, when the deficit will be de facto higher, the Member States will manage to fulfill their obligations.
In the existing framework, there are two such upper limits which in the case of Greece entail a maximum deficit equal to 0.5% of GDP and 0.7% of GDP respectively.
Under the new rules, the above limits are abolished and replaced by a single and less stringent deficit ceiling, which stipulates that the deficit should not exceed 1.5% of GDP.
3) National ownership and medium-term planning
With the new system we return to a less horizontal architecture based on individual four-year national fiscal adjustment plans.
These Plans should of course follow the agreed common rules, while the European Commission will issue for each state a technical proposal (“technical trajectory”) for the evolution of the variable that will be the focus of the fiscal adjustment, namely net primary public expenditure.
The Commission’s proposal will form the basis of discussion for final decisions. Each state will be able to propose its own proposal for fiscal adjustment, taking into account the particular circumstances it faces. It is even explicitly recognized that the course of development of public expenditure may deviate from that proposed by the European Commission as long as this is sufficiently documented.
This process is analogous to that of the approval of the national recovery and resilience plans implemented under the NextGenEU program. Thus, national ownership of the fiscal adjustment plans is significantly increased.
It also recognizes the possibility of revising the four-year plans before their completion, either in the event of a change of government or when changes occur that make their implementation impossible.
In this way, on the one hand, the right of the democratically elected governments to integrate their own economic priorities into the Adjustment Plans is recognized, while respecting the general framework of the agreed rules, while at the same time it is ensured that when unforeseen events occur, the states will not be bound by outdated plans.
4) Protection of pro-development investments
The new fiscal rules create more fiscal space to make investments that are developmental in nature and contribute to addressing contemporary challenges such as the digital and green transition, tackling the climate crisis, energy security, economic resilience, social cohesion and defence. .
This does not mean completely excluding them from the calculation of the deficit and the debt. Such a thing would not be possible, given that these expenses would eventually have to be paid from somewhere.
However, states that commit to a set of reforms and investments will be able to request a longer adjustment period (up to 7 instead of 4 years) in order to achieve their fiscal targets.
5) Escape clauses
The new framework explicitly recognizes the possibility of deviations from the provisions of the four-year Adjustment Plans, either in the event of a severe economic recession in the euro area or the EU (“General Clause”), or in exceptional circumstances beyond the control of the national governments and have a significant impact on their public finances (“special clause”).
The decision will be taken by the Council of Ministers following a proposal from the European Commission. Particularly important is the fact that with regard to the special clauses it is recognized that the initiative to start the procedure will be given to the member states who will submit a relevant request to the European Commission (it turned out to be a request from Greece that was accepted).
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