EU fiscal rules (SGP, debt brakes, ESM)

The EU's fiscal rules cap member-state deficits and debt: the Stability and Growth Pact's 3% deficit and 60% debt reference values, the national expenditure paths introduced in 2024, national debt brakes, and the conditions attached to ESM lending. They are legal and political limits, not limits on what a currency union can produce or afford.

The Stability and Growth Pact sets reference values of a 3% of GDP budget deficit and public debt of 60% of GDP. The reform adopted in April 2024 made a single operational indicator, a path for government spending net of discretionary revenue measures, the centre of the framework. Each member state agrees a medium-term fiscal-structural plan with an adjustment period of four years, which can be extended to seven in return for reform and investment commitments. A country with debt above 60% of GDP that deviates from its agreed spending path can now also be placed in the excessive deficit procedure.

Several member states add their own constitutional limits, such as Germany's debt brake, and loans from the European Stability Mechanism come with policy conditions. None of these limits measures the things that matter for living standards: whether workers are unemployed, whether factories stand idle, or whether prices are stable. A deficit ratio cannot say how close an economy is to full employment.

Without fixed ratios, what would stop a government overspending? The real danger of overspending is inflation, which can be measured directly. A framework built around employment, prices and available resources would restrain spending when the economy is at capacity and allow it when people and machines are idle.