(MENAFN) Following extensive negotiations, the European Union has finally approved a highly anticipated reform of its fiscal rules, signaling a shift towards tighter budgetary controls amidst projections of weakening growth prospects across the continent. The agreement, reached by European negotiators representing member state governments and the European Parliament, entails the establishment of annual targets for reducing public debt and imposing limits on public spending – a key demand particularly emphasized by Germany.
Central to this reform is the provision granting treasuries greater flexibility for public investment, allowing countries to gradually reduce their excessive debt burdens over a period ranging from four to seven years. Notably, exemptions have been incorporated into the agreement to accommodate the concerns of countries such as France and Italy, enabling a more gradual tightening of fiscal policies.
The decision to overhaul fiscal rules comes in the wake of the temporary suspension of the "Stability and Growth Pact," which imposed constraints on public deficits and domestic debt levels at 3 percent and 60 percent of GDP respectively, over the past four years. This suspension was enacted to facilitate economic recovery from the pandemic and shield member states from the economic repercussions of geopolitical tensions, such as the ongoing Russian-Ukrainian conflict, which exacerbated debt and deficit levels across the bloc.
Economists anticipate that the reformed fiscal framework will prompt governments to incrementally curtail their expenditure, thereby impacting the already fragile economic landscape of the region. Despite modest growth of 0.5 percent recorded in 2023, the European Central Bank projects a marginal increase to 0.8 percent in the euro zone economy for the current year. However, expectations of downward revisions to growth forecasts for 2024 by the European Commission this week underscore prevailing uncertainties.
Dani Stoilova, an economist at BNP Paribas, estimates that the implementation of new financial requirements could potentially detract between 0.1 and 0.2 percentage points from GDP growth over the next two years, highlighting the anticipated economic ramifications of the revised fiscal regulations.
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