After four crucial years of debate, negotiators from both the European Council and the European Parliament finally reached a last-minute agreement on the reform of the EU’s economic governance framework in the early hours of Saturday (10/1) morning.

The provisional agreement now needs approval from the committee of member countries’ permanent representatives in the Council and the Parliament’s economic affairs committee (ECON), before heading to a formal vote in both the Council and the Parliament in April. The stakes are exceptionally high, as the outcome of the reform will guide how much EU member states can spend and invest as of 2025. 

While it seems likely that an agreement on the EU fiscal rules is on the horizon, there are concerns that the new rules could hinder rather than promote a just transition to a more sustainable future.

Austerity Trap

While the initial proposal by the Commission was already not a big game-changer, it did offer some more flexibility. The EC suggested country-specific debt reduction pathways counteracting the current debt rules, with its one-size-fits-all solution and unrealistic debt reduction plans for many member states. The idea was that the member states would follow the EU’s proposed four-year plans to reduce debt, with the possibility of three additional years if member states commit to undergoing reforms.  

But the Saturday agreement doubles down on strict annual debt and deficit reduction goals. Countries with debts over 90% will need to reduce their debt on average by 1% per year and by 0.5% per year on average if their debt is between 60% and 90% of GDP. The so-called 1/20 rule, which requires every country to cut debt annually by 1/20 of the excess over 60%, has been scrapped. However, it adds another “deficit resilience margin,”  which requires countries to reduce their deficit to 1.5% of GDP instead of the current 3% deficit target. This will lead to significant budget cuts in some member states despite having sustainable debt, potentially jeopardizing crucial investments for the green and just transition. France, for example, could face a yearly reduction of at least €30 billion in public spending. A more detailed analysis is available here.

Beyond that, the agreement is a disaster from the environmental and climate perspective. The “Do No Significant Harm to Climate and Environment (DNSH)” principle, which is crucial to improving the quality of public spending, is not included.

What the New Rules Could Mean

Despite last-minute minor improvements excluding national co-financing from the net expenditure, which offers insignificant impact, the agreement’s overall outcome will likely be damaging.

Budget cuts could severely weaken the fight against the climate crisis, jeopardizing efforts to build a sustainable and just future for all. A recent study found that we must invest around €40 trillion by 2025 to reach climate neutrality. This means that we need to double public investment from €250 to €510 billion per year to drive private investment. However, these ambitious goals are incompatible with the new fiscal rules. These rules require some member states to reduce their budget deficits to 1.5% of GDP, stricter than the previous 3% rule. This creates a significant challenge, especially for highly indebted countries and those most vulnerable to climate crises. In addition, these new rules offer no guarantee of additional fiscal space for investments in the just and green transition. This can be particularly problematic for poorer nations, who are often hardest hit by climate change, forcing them to consolidate budgets and potentially halt crucial investments. 

Slashing public services and safety nets doesn’t hurt everyone equally, it would hit the most vulnerable hardest. Think single parents, the elderly, and low-income families. This widens the gap between rich and poor, fueling anger and frustration towards governments and institutions. Research shows a clear link between austerity cuts and rising anti-EU sentiment, sometimes connected to right-wing extremist groups. In short, austerity creates resentment and blocks progress, making people lose faith in their governments.

Urgent Call to Action

“The agreed rules on the table put our commitments to a just and green transition at risk. With the clock ticking towards the April plenary vote, we urge Members of Parliament to act decisively and prevent a wave of austerity which would be disastrous for both environment and people.” – Katy Wiese, Policy Manager for Economic Transition and Gender Equality at the EEB

At the same time, we need to think about other ways to create public funds for the transition: We need to start discussions about a new permanent EU transformation fund following the Recovery and Resilience Facility and progressive taxes such as an EU wealth tax, financial transaction tax that generate resources for green and social investments without increasing the burden for citizens.