The European Central Bank published an Economic Bulletin article reviewing the first national medium-term fiscal-structural plans under the revised Stability and Growth Pact, providing an initial assessment of their fiscal and macroeconomic implications and of the European Commission’s proposal to use the Stability and Growth Pact’s national escape clause to accommodate higher defence spending. The article outlines how the reformed framework shifts surveillance to a Debt Sustainability Analysis-based approach with net expenditure as the single operational indicator, monitored via a control account that can trigger enforcement if deviations breach thresholds. In the euro area, the Economic and Financial Affairs Council endorsed 15 of the 16 submitted plans, while Belgium’s plan is still awaiting assessment and Germany, Lithuania and Austria have yet to submit plans. Five countries (Belgium, Spain, France, Italy and Finland) opted for the seven-year adjustment period in return for reform and investment commitments. Across submitted plans, cumulative net expenditure growth is often above the Commission’s earlier reference trajectories, largely reflecting updated starting fiscal positions and macro assumptions; planned adjustments generally appear to respect the “no backloading” requirement. The article also flags that Commission opinions on 2025 draft budgetary plans point, in some cases, to fiscal gaps versus the plans’ net expenditure paths that would generate control account debits, and ECB simulations indicate that persistent deviations and potential control account resets could materially weaken debt reduction in high-debt countries. On defence spending, the article summarises the Commission’s proposed coordinated activation of the national escape clause, under which Member States would request activation by the end of April and could deviate from endorsed net expenditure paths or excessive deficit procedure corrective paths for additional defence outlays, subject to preserving medium-term fiscal sustainability. The flexibility is capped at 1.5% of GDP per year over 2025-28, is limited to additional defence expenditure (COFOG division 02) including both current and investment spending, and is calculated relative to 2021, with higher spending levels to be sustained after 2028 through gradual budget reprioritisation. Net expenditure ceilings in the plans would remain in place, with compliance assessed net of the defence spending covered by the clause, and ECB illustrative scenarios show that maximum use could initially worsen debt dynamics and shift consolidation needs into the post-2028 period.
European Central Bank 2025-04-30
European Central Bank reviews first medium-term fiscal-structural plans and 1.5% of GDP defence spending flexibility under the reformed Stability and Growth Pact
The European Central Bank's Economic Bulletin reviews the first national medium-term fiscal-structural plans under the revised Stability and Growth Pact, highlighting a shift to a Debt Sustainability Analysis-based approach. The article discusses the European Commission's proposal to use the national escape clause for increased defence spending, capped at 1.5% of GDP annually from 2025-28. While most plans align with fiscal requirements, deviations could weaken debt reduction in high-debt countries.