Imagine a theatre debut long in preparation, marred by controversy, and eagerly anticipated. When the curtain finally rises, the audience learns that the first act has already taken place behind closed doors. What follows is a performance that promises clarity but leaves important things unsaid.
This metaphor aptly captures the rollout of the EU’s reformed fiscal rules. After years of tough negotiation, the new framework for economic governance entered into force in April 2024. It was presented as the most ambitious overhaul since the global financial crisis – a turning point meant to reconcile the twin goals of stability and growth that have troubled the EU since the inception of the Stability and Growth Pact (SGP) in 1997 (European Commission 2025).
The European Fiscal Board (EFB) has carefully reviewed the debut of this reform (European Fiscal Board 2025). The following assessment summarises the main findings, highlighting conceptual innovations as well as shortcomings.
Key elements of the new EU fiscal framework
At the heart of the 2024 reform lies a simple but ambitious idea: greater national ownership of fiscal policy. Instead of imposing numerical, one-size-fits-all targets from Brussels, the system now revolves around a bespoke multiannual adjustment path for net expenditure, negotiated between each member state and the EU.
The process begins with reference trajectories prepared by the European Commission. These simulations, based on detailed and country-specific debt sustainability analyses, illustrate two trajectories for each country: (1) a baseline projection assuming current policies, and (2) the maximum permissible growth rate of expenditure consistent with a declining debt ratio over the medium to long term. Member states with debt above 60% of GDP or deficits exceeding 3% receive such reference scenarios as a starting point.
The reference trajectories are not binding. Governments may depart from the Commission’s assumptions – using different macroeconomic projections or budgetary elasticities – provided deviations are well justified and documented. They may also extend the adjustment horizon from four to seven years if they commit credibly to reforms or investments that strengthen resilience and the sustainability of public finances. The outcome is formalised in a medium-term fiscal-structural plan, submitted to the Commission and Council of Ministers.
The central benchmark of the new framework is a multiannual net expenditure path – total expenditure net of interest payments, cyclical unemployment costs, and certain one-offs, adjusted for discretionary revenue measures. Compliance with this multiannual path, rather than moving annual targets, becomes the main operational rule. The Commission monitors progress annually and records deviations in a control account. If slippages exceed 0.3% of GDP in one year or 0.6% over several years, an excessive deficit procedure can be triggered.
This shift offers several potential advantages. A single transparent indicator replaces the previous tangle of partly conflicting metrics (headline balance, structural balance, expenditure rule). The medium-term focus is meant to mitigate the risk of pro-cyclical fiscal tightening or expansions. And perhaps most importantly, by allowing governments to design their own plans, it increases domestic accountability: if the rules are self-authored, blaming "Brussels" becomes less credible.
The reform’s proponents see this as an effective response to past experience characterised by very mixed results.
Previous attempts to strengthen enforcement through sanctions failed; penalties were never applied in practice. The hope now is that ownership – rather than fear of fines – will foster discipline. Yet this optimism assumes that national commitment can substitute for supranational enforcement, an assumption that deserves scrutiny.
A hurried transition and limited transparency
Assessing the reform’s success will take time. The first four-year cycle will conclude only in 2028. However, the early implementation phase already reveals several issues.
First, the transition was rushed. As part of the political compromise enabling agreement on the reform in late 2023, the Commission and the Council of Ministers opted for an immediate "flying start". Member states were asked to prepare their 2025 medium-term plans as soon as the new regulation entered into force in April 2024. The result was a shift of attention away from the previously issued recommendations for 2024. Many governments used the fiscal space created by the expiry of temporary energy-support measures and revenue windfalls to increase current spending instead of reducing deficits. As a result, the 2024 recommendations were largely missed - without consequence, since the focus had already moved to the new framework (see Figure 1).
Figure 1 Expenditure trends in 2024, EU27
Notes: (1) The medium-term rate of potential output growth is in nominal terms. The GDP deflator is fixed at the ECB’s 2% inflation target. (2) Net expenditure growth refers to the growth rate of government expenditure, excluding interest expenditure, expenditure on EU programmes fully matched by EU funds revenue, and the cyclical part of unemployment benefit expenditure and is net of discretionary revenue measures and one-offs. (3) Energy support measures include government initiatives aimed to counter the economic and social impact of the increase in energy prices. (4) Underlying net expenditure growth stands for net expenditure growth after excluding the effect of energy support measures. (5) Countries are grouped by their government debt level in 2024. Low debt countries (debt ratio < 60% of GDP) = BG, CZ, DK, EE, HR, LV, LT, LU, MT, NL, PL, RO, SK and SE; high debt countries (debt ratio between 60% and 90% of GDP) = DE, IE, CY, HU, AT, SI and FI; very high debt countries = BE, EL, ES, FR, IT, and PT. The values for country groups are GDP-weighted averages.
Sources: European Commission, EFB calculations
Second, and more seriously, the new system began under a veil of opacity. In contrast to earlier practice where adjustment requirements were made public right at the beginning of the surveillance cycle, the Commission’s reference trajectories were initially shared only with national authorities, not with independent fiscal institutions, financial markets, or the public at large. This confidentiality, though formally allowed, represented a clear step back in transparency. Only a handful of governments voluntarily published the Commission’s simulations.
Why did legislators choose secrecy over openness? The likely reason is political caution: governments may have feared that early publication might anchor the public debate and constrain their room for negotiation. Yet withholding such information undermines democratic accountability and contradicts the principle that transparency strengthens, rather than weakens, legitimacy.
The Commission’s reference trajectories became public only many months later, when national plans were formally submitted – often after the main policy choices had already been made. This sequence deprived the process of genuine multilateral scrutiny, one of the cornerstones of the EU’s fiscal governance architecture. In theory, the Council of Ministers should assess each plan collectively before endorsement. In practice, its role was more limited than possibly expected.
Moreover, the Commission, while obliged to assess the plans, refrained from challenging substantial deviations from its baselines. With the exception of the Netherlands, every plan was accepted – even when significant differences in growth assumptions were not substantiated by "sound and data-based economic arguments", as required by law. The Council’s review added little: lacking analytical capacity of the Commission services, it largely accepted the outcome of the Commission’s bilateral exchanges with member states, even if those exchanges are formally meant to be of technical nature.
The outcome is illustrated in Figure 2, which compares national growth assumptions with the Commission’s prior guidance. Most plans assume higher cumulative economic growth, in many coupled with faster expenditure growth. If actual economic growth falls short, debt and deficit ratios will decline more slowly than envisaged or even increase – yet countries will still be formally compliant as long as they adhere to their expenditure paths. This design choice, while technically consistent with the new rules, exposes the system to optimistic bias and underscores the need for prudent long-term forecasting.
Figure 2 Cumulative differences between medium-term fiscal-structural plans and Commission reference trajectories: Net expenditure versus nominal GDP growth (percentage points)
Notes: ‘Cumulative’ refers to the programme period of 4 or 5 years.
Source: European Commission, EFB calculations
New rules meet new forms of discretion
Barely had the new framework entered into operation when the Commission signalled its willingness to activate exceptions. On 19 March 2025, it invited member states to use the national escape clause, allowing temporary deviations from the agreed expenditure path for increases in defence spending, provided medium-term sustainability was not jeopardised. The invitation followed the Readiness 2030 initiative – Europe’s coordinated defence and security response to the shifting geopolitical landscape after the US policy pivot and Russia’s ongoing aggression in Ukraine.
Few dispute the urgency of strengthening Europe’s defence capacity. At the same time, the Commission’s interpretation of the clause blurred its boundaries: in some cases, it will accommodate unrelated spending increases. The early recourse to this flexibility raises doubts about whether the new rules can withstand political pressure when circumstances become demanding.
Even more revealing was the handling of the excessive deficit procedure (EDP). Despite clear evidence in the spring of 2024 that several countries had breached the 3% of GDP deficit threshold the year before, the Commission chose to not to open the procedure. In other cases, it postponed key steps of the EDP – notably, recommendations to correct the excessive deficit – a departure from both relevant legal provisions and past practice. The official justification was that deficit corrections should align with the newly introduced medium-term plans, which were not yet available and, in several cases, delayed by months.
As a result, EDP recommendations were adopted only in January 2025, more than six months after the breaches were identified. This delay not only postponed necessary consolidation but also inverted the hierarchy of the EU’s surveillance instruments. The EDP, designed as the ultimate escalation mechanism of the Stability and Growth Pact – the EU’s commonly agreed fiscal rules – became effectively subordinate to the preventive arm of the new framework.
Such discretion risks eroding the credibility of the system. If the Commission and Council of Ministers treat formal breaches as negotiable, member states may infer that the new rules – like their predecessors – will be flexibly interpreted whenever political consideration demands.
Concluding reflections
Defenders of the reform might argue that the teething problems observed in 2024–2025 are inevitable in any major institutional transition. Learning by doing, they might say, will improve implementation. There is some truth in that. Yet the specific design of the new framework magnifies the cost of early errors. Because each country’s expenditure path is fixed for at least four years, initial misjudgements will snowball over time.
Moreover, several operational details remain unresolved. Key technical aspects – such as the exact functioning of the control account or the treatment of certain one-off measures – are still being clarified. Until these ambiguities are settled, the system’s consistency will depend heavily on the Commission’s discretion, which in turn invites political bargaining.
The broader question is whether delegated national responsibility without effective enforcement can sustain fiscal discipline in a monetary union. History offers reasons for caution. Earlier reforms sought to foster compliance through a growing arsenal of financial disincentives and sanctions. Yet these mechanisms were never used, undermining deterrence. The 2024 reform takes the opposite approach: it bets on trust, assuming that governments will internalise long-term sustainability once they own the process.
This may prove either an ingenious evolution or a form of resignation. Ownership may indeed foster compliance where external coercion failed – but only if it is accompanied by transparency, robust peer review, and a credible threat of enforcement in case of persistent deviations. Without these safeguards, national plans risk becoming political manifestos rather than binding commitments.
Ultimately, the credibility of Europe’s new fiscal architecture will hinge less on the elegance of its design than on the political will to apply it consistently. The curtain has now risen on Act two of Europe’s fiscal play. Whether it will unfold as a well-scripted performance or an improvised experiment remains to be seen.
Authors’ note: The views expressed in this column do not necessarily reflect those of the European Commission, the European Fiscal Board or any other institution the authors are affiliated with.
References
European Commission (2025), "2025 European Semester: bringing the new economic governance framework to life", Communication from the Commission to the European Parliament, the Council and the European Central Bank, COM(2024) 705 final.
European Fiscal Board (2019), "Assessment of EU fiscal rules with a focus on the six and two-pack legislation", Brussels.
European Fiscal Board (2025), Annual Report 2025, Brussels.
Larch, M, J Malzubris, S Santacroce (2023), "Numerical compliance with EU fiscal rules: Facts and figures from a new database", Intereconomics 58(1): 32-42.
