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Three Key Numbers: What's the Truth Behind Government Deficits and Debt Limits?
In the context of global economic instability, the control of government deficits and public debt has become an important issue for governments around the world. Particularly in the European Union (EU), the Stability and Growth Pact (SGP) aims to provide a framework to ensure that member states maintain fiscal discipline within the Economic and Monetary Union (EMU). This agreement not only covers the budget status of member states, but also involves complex regulations and supervision mechanisms aimed at ensuring the economic stability of the euro area.
According to the SGP, each member country must maintain a government deficit of no more than 3% of GDP and a public debt of no more than 60% of GDP.
Since the Stability and Growth Pact was formulated in 1997, it has undergone many reforms. The latest one is the "general escape clause" triggered from 2020 to 2023 due to the new crown epidemic and the subsequent situation in Ukraine, allowing some member states to respond to financial pressures more flexibly. However, the temporary lifting of this clause does not eliminate the fundamental challenge, as some European countries still face the pressure of rising debt. This makes us wonder, in the face of global economic shocks, are government deficit and public debt control strategies sufficient to deal with potential economic crises?
After the European sovereign debt crisis in 2010, most member states expressed support for the signing of the Fiscal Compact (fiscal austerity treaty), aiming to strengthen Europe's fiscal strategy. This agreement not only requires member states to incorporate fiscal strategies into their domestic legislation, but also promotes stronger budget discipline. Under this framework, governments are expected to achieve budget balances or surpluses.
This new regulation requires member states' government deficits to not exceed 3% of GDP, and structural deficits to be limited to national medium-term budget objectives (MTO).
As of 2023, 16 of the 27 European Union member states have been found to have violated the SGP's standards when assessing their 2022 fiscal results and 2023 budgets. These violations were exempted under special circumstances, preventing the new Excessive Deficit Procedure (EDP) from being initiated. But is this flexibility enough to guarantee long-term economic stability? Will future economic needs force these countries to revisit their budget policies amid new technological challenges and geopolitical circumstances?
Faced with various challenges, the EU needs to continue to adjust its budget and fiscal policy governance. The re-reform of the SGP due in 2024 will introduce more flexibility, adding EDP measures that will be extended from four to seven years, which may give non-compliant countries more time to improve their fiscal positions. The expected effect of this provision is to better adapt to the economic conditions of each country and improve the ability to respond to potential crises in the future.
However, can these reforms really ensure appropriate fiscal burdens and promote sustained economic stability? People can't help but wonder, how can European countries find a balance between fiscal discipline and economic growth so that they can remain invincible in an uncertain global economy?
In the days to come, with the implementation of relevant EU policies, the SGP and its reforms will become an important indicator for observing the fiscal discipline of various countries. Today, with capital flows accelerating and the international trade environment constantly changing, how countries adjust their fiscal strategies and face the challenges of government deficits and public debt will have a profound impact on the entire European economy.
In an increasingly interconnected world, faced with government deficits and public debt, can Europe form a collaborative and win-win situation to continue to ensure economic stability and prosperity?
