EU identifies fiscal irregularities in eight member states amid major political shifts
The EU Commission has issued formal warnings to eight of its member states over fiscal irregularities because of the excessive budget deficits, marking the revival of a contentious fiscal oversight mechanism that had been paused during the pandemic. The countries under scrutiny include Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia, with Romania facing the most severe censure for failing to address previous EU warnings about fiscal irresponsibility.
This development comes at a critical juncture, as France prepares for significant legislative elections and the EU’s top officials seek reappointment. The Commission’s action initiates a process that could lead to financial penalties for the indebted nations.
“Longstanding structural challenges are holding back the EU’s competitiveness,” stated EU Commissioner Valdis Dombrovskis. “We look forward to receiving national fiscal structural plans from Member States that bring down debt and deficit and reflect today’s recommendations.”
In 2020, Romania was instructed by the EU Council to rigorously implement measures to correct its fiscal imbalance by 2022. Despite this, Romania is expected to have the largest deficit in the EU next year, at 7% of GDP, making it the only EU country now deemed to have an excessive macroeconomic imbalance. Brussels has urged Romania to reform its taxation and public sector wages to rectify this dire situation.
Nations avoid formal censure
Some nations narrowly avoided formal censure. Estonia’s increased spending, attributed to defense, along with minor or temporary budget norm breaches by Spain, Finland, Slovenia, and Czechia, were deemed understandable or less severe.
The EU’s fiscal rules, established alongside the common currency in the 1990s, dictate that national fiscal imbalances should not exceed 3% of GDP, with overall debt kept below 60%. These rules have historically been contentious, with northern member states like Germany and the Netherlands opposing what they perceive as reckless spending by countries like Greece and Italy.
The Commission’s move is expected to be particularly controversial in France, which recently experienced a credit rating downgrade and is set for snap legislative elections at the end of June. Marine Le Pen, leader of the far-right National Rally, has proposed reducing the retirement age and cutting VAT on fuel. In contrast, Finance Minister Bruno Le Maire has warned of a potential “debt crisis” from Le Pen’s program, likening it to the market turmoil following British Prime Minister Liz Truss’s 2022 budget.
Belgium, facing a nearly 5% deficit next year, is also in political turmoil following the resignation of liberal Prime Minister Alexander De Croo after a disappointing election result.
Political implications on fiscal irregularities
This fiscal scrutiny occurs as Commission President Ursula von der Leyen seeks a second term, with Italy’s Prime Minister Giorgia Meloni among those yet to confirm their support. Von der Leyen needs endorsement from EU leaders and the European Parliament, where Meloni and her allies recently performed well.
Today’s reports mark the first step in a protracted procedure that could result in fines for countries deemed to jeopardize the euro’s financial stability. The fiscal framework had been suspended in 2020 due to the Covid crisis and subsequent energy price spikes, prompting unprecedented economic interventions by governments.
Earlier this year, member states agreed on a more flexible set of budget constraints, allowing for increased spending on climate change and defense. The EU Commission’s recent actions initiate a months-long process of discussion and analysis, with finance ministers expected to endorse formal recommendations for addressing fiscal irregularities by December.