Council Regulation (EU) 2024/1264 of 29 April 2024 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(14), second subparagraph, thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Parliament (1),

Having regard to the opinion of the European Central Bank (2),

Acting in accordance with a special legislative procedure,

Whereas:

(1) The coordination of the economic policies of the Member States within the Union, as provided for by the Treaty on the Functioning of the European Union (TFEU), entails compliance with the guiding principles of stable prices, sound public finances and monetary conditions and a sustainable balance of payments.

(2) The economic governance framework of the Union, which comprises an elaborate system of policy coordination and surveillance of Member States’ economic policies, has guided Member States in achieving their economic and fiscal policy objectives. Since the Treaty on European Union (3) (TEU), done at Maastricht on 7 February 1992, the economic governance framework has helped achieve macroeconomic convergence, safeguard sound public finances and address macroeconomic imbalances. Together with a common monetary policy and a common currency in the euro area, the economic governance framework has created conditions for economic stability, sustainable and inclusive economic growth and higher employment for citizens of the Union.

(3) The Stability and Growth Pact, which initially consisted of Council Regulations (EC) No 1466/97 (4) and (EC) No 1467/97 (5) and the Resolution of the European Council of 17 June 1997 (6), is based on the objective of sound and sustainable government finances as a means of strengthening the conditions for price stability and for strong, sustainable and inclusive growth underpinned by financial stability, thereby supporting the achievement of the Union’s objectives for sustainable growth and employment.

(4) In the third stage of economic and monetary union, the Member States are, pursuant to Article 126(1) TFEU, under the obligation to avoid excessive government deficits.

(5) The economic governance framework of the Union should be adapted to better take into account the increased heterogeneity of fiscal positions, public debt and economic challenges, as well as other vulnerabilities across Member States. The strong policy response to the COVID-19 pandemic proved highly effective in mitigating the economic and social consequences of the crisis caused by that pandemic, but resulted in a significant increase in public- and private-sector debt ratios, underscoring the importance of reducing debt ratios and deficits to prudent levels in a gradual, realistic, sustained and growth-friendly manner ensuring leeway for counter-cyclical policies and addressing macroeconomic imbalances, while paying due attention to employment and social objectives. At the same time, the economic governance framework of the Union should be adapted to help address the medium- and long-term challenges facing the Union, such as achieving a fair digital and green transition, including the climate objectives set out in Regulation (EU) 2021/1119 of the European Parliament and of the Council (7), ensuring energy security, supporting open strategic autonomy, addressing demographic change, strengthening social and economic resilience and sustained convergence, and implementing the Strategic Compass for Security and Defence, all of which require reforms and sustained high levels of investment in the years to come.

(6) The economic governance framework of the Union should promote sound and sustainable public finances and sustainable and inclusive growth and therefore differentiate between Member States by taking into account their public debt and economic challenges and by allowing multiannual country-specific fiscal paths, while ensuring effective multilateral surveillance and respecting the principle of equal treatment.

(7) To ensure a transparent and common Union framework based on the reference values referred to in Article 126(2) TFEU and Protocol (No 12) on the excessive deficit procedure annexed to the TEU and TFEU (‘Protocol (No 12)’), stronger enforcement underpinning multilateral surveillance should be the necessary counterpart of a risk-based surveillance framework that allows for country-specific fiscal paths.

(8) In order to simplify the Union fiscal framework and increase transparency, a single operational indicator anchored in debt sustainability should serve as a basis for setting the fiscal path and for carrying out annual fiscal surveillance for each Member State. That single operational indicator should be based on nationally financed net primary expenditure, that is to say: government expenditure net of interest expenditure, discretionary revenue measures, expenditure on Union programmes fully matched by revenue from Union funds, national expenditure on co-financing of programmes funded by the Union, as well as cyclical elements of unemployment benefit expenditure. In line with the guiding principles that are used by the Commission for classifying transactions as one-offs and other temporary measures, those one-offs and other temporary measures should also be excluded from the net expenditure indicator. That indicator, which is not affected by the operation of automatic stabilisers and other expenditure fluctuations outside the direct control of the government, provides leeway for counter-cyclical macro-economic stabilisation.

(9) The excessive deficit procedure for breaches of the deficit reference value of 3 % of gross domestic product (GDP), referred to in Article 126(2) TFEU and Protocol (No 12) is a well-established element of the Union’s fiscal surveillance framework that has been effective in influencing fiscal policy in the Member States.

(10) To strengthen the excessive deficit procedure for breaches of the debt criterion of 60 % of GDP, referred to in Article 126(2) TFEU and Protocol (No 12) the focus should be on departures from the net expenditure path set by the Council pursuant to Regulation (EU) 2024/1263 of the European Parliament and of the Council (8).

(11) Pursuant to Regulation (EU) 2024/1263, the Council, following a recommendation from the Commission, could allow Member States to deviate from the net expenditure path set by the Council under that Regulation in the event of a severe economic downturn in the euro area or the Union as a whole, or in the event of exceptional circumstances outside the control of the government with a major impact on the public finances of the Member State concerned, provided that it does not endanger fiscal sustainability in the medium term. As a consequence, such deviation should not be registered in the control account nor lead to the opening of a debt-based excessive deficit procedure.

(12) When assessing the existence of an excessive deficit in accordance with Article 126(3) TFEU, the Commission should take into account all relevant factors. Substantial public debt challenges in the Member State concerned should be considered a key aggravating factor.

(13) Acknowledging the rising geopolitical tensions and security challenges, and the corresponding need for Member States to build-up their capabilities, the increase of government investment in defence, where applicable, should be considered as a relevant factor when assessing the existence of an excessive deficit in accordance with Article 126(3) TFEU. That factor could be assessed against Union averages, medium-term trends or other relevant benchmarks, considering also the statistical rules concerning the time of recording of military equipment expenditure.

(14) To keep track of actual deviations from the net expenditure path as set out in Regulation (EU) 2024/1263, the Commission should set up a control account for each Member State to keep track of annual deviations over time. The information in the control account should be the basis of enforcement actions. In particular, the Commission should prepare a report in accordance with Article 126(3) TFEU where the ratio of the government debt to GDP exceeds the reference value, the budgetary position is not close to balance or in surplus and where the deviations recorded in the control account of the Member State exceed the established annual or cumulative thresholds. The budgetary position shall be considered close to balance if the general government deficit does not exceed 0,5 % of GDP.

(15) The corrective net expenditure path under the excessive deficit procedure should bring or keep the general government deficit below the reference value of 3 % of the GDP referred to in Article 126(2) TFEU and Protocol (No 12) by the deadline set by the Council. The corrective net expenditure path under the excessive deficit procedure would in principle be the one originally set by the Council, while taking into account the need to ensure a minimum structural adjustment of 0,5 percentage point of GDP in case of a breach of the deficit criterion or the need to correct the deviation from that path as a rule in case of a breach of the debt criterion. In case the original path is no longer feasible, due to objective circumstances, the Council should be able to set a different path under the excessive deficit procedure.

(16) For Member States under an excessive deficit procedure, the Council, on a recommendation from the Commission, should continue to be able to extend the deadline for the correction of the excessive deficit where it establishes the existence of a severe economic downturn in the euro area or in the Union as a whole in accordance with Regulation (EU) 2024/1263, or in the case of exceptional circumstances outside the control of the government with a major impact on the public finances of an individual Member State in accordance with Regulation (EU) 2024/1263, and provided that it does not endanger fiscal sustainability in the medium term.

(17) Specific provisions of Regulation (EC) No 1467/97 related to the contributions to second pillar pension systems should be deleted since the net expenditure path set by the Council should already take into account the revenue loss related to such contributions.

(18) Independent fiscal institutions have proven their capacity to foster fiscal discipline and strengthen the credibility of Member States’ public finances. In order to enhance national ownership, the advisory role of independent fiscal institutions should be maintained in the reformed economic governance framework of the Union, with a view to gradually building up their capacities. A permanent more independent European Fiscal Board should play a more prominent advisory role in the economic governance framework of the Union.

(19) Clear conditions should be laid down for the abrogation of excessive deficit procedures. Abrogation should require the deficit to remain credibly below the reference value of 3 % of GDP referred to in Article 126(2) TFEU and Protocol (No 12) and, for a debt-based excessive deficit procedure, that the Member State demonstrates compliance with the net expenditure path under the excessive deficit procedure.

(20) The fines provided for in Article 126(11) TFEU should not provide for a minimum amount but they should accumulate until effective action is taken, in order to constitute a real incentive for compliance with the notices given to Member States under an excessive deficit procedure in accordance with Article 126(9) TFEU.

(21) This amending Regulation is part of a package together with Regulation (EU) 2024/1263 and Council Directive (EU) 2024/1265 (9). Together, these three legislative acts (hereinafter jointly referred to as ‘the economic governance framework reform’) reform the economic governance framework of the Union, incorporating into Union law the substance of Title III (Fiscal Compact) of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (10) of 2 March 2012 (the ‘TSCG’), in accordance with Article 16 of that Treaty. By building on the experience of the implementation of the TSCG by the Member States, the economic governance framework reform retains the Fiscal Compact’s medium-term orientation as a tool to achieve budgetary discipline and growth promotion. The economic governance framework reform includes a strengthened country-specific dimension aimed at enhancing national ownership, including by maintaining the advisory role of independent fiscal institutions, which draws on the Fiscal Compact’s common principles on national fiscal correction mechanisms proposed by the Commission in its communication of 20 June 2012 in accordance with Article 3(2) TSCG. The analysis of expenditure net of discretionary revenue measures for the overall assessment of compliance required by the Fiscal Compact is set out in Regulation (EU) 2024/1263. As in the Fiscal Compact, temporary deviations from the medium-term plan are only permitted in exceptional circumstances in accordance with Regulation (EU) 2024/1263 and in line with the provisions of the control account. In a similar vein to the Fiscal Compact, in the event of significant deviations from the medium-term plan, measures should be implemented to correct the deviations over a defined period. The economic governance framework reform strengthens fiscal surveillance and enforcement procedures to deliver on the commitment of promoting sound and sustainable public finances and sustainable and inclusive growth. The economic governance framework reform thus retains the fundamental objectives of budgetary discipline and debt sustainability set out in the Fiscal Compact.

(22) Transitional provisions are needed for Member States that are under an excessive deficit procedure when the reformed framework enters into force. Recommendations under Article 126(7) TFEU and notices under Article 126(9) TFEU that have been adopted prior to the entry into force of this amending Regulation need to be revised in order to align them to the amended provisions of Regulation (EC) No 1467/97. That would allow the Council to set a corrective net expenditure path consistent with those new provisions for Member States that have taken action, without stepping up the excessive deficit procedure.

(23) Whereas the rules of the deficit-based excessive deficit procedure remain unchanged with a minimum annual structural improvement of at least 0,5 % of GDP as a benchmark, against the backdrop of the significantly changed interest rate environment, the Commission may, during a transition period in 2025, 2026 and 2027 — in order not to compromise the positive effects of the Recovery and Resilience Facility, established by Regulation (EU) 2021/241 of the European Parliament and of the Council (11) — adjust the benchmark to take into account the increase in interest payments when setting the proposed corrective path relating to the first medium-term fiscal-structural plan for the years 2025, 2026 and 2027 within the excessive deficit procedure, provided that the Member State concerned explains how it will ensure the delivery of the reforms and investments responding to the main challenges identified in the context of the European Semester, in particular in the country-specific recommendations, and address the common priorities of the Union as laid down in Regulation (EU) 2024/1263, consistent with the objective of achieving the green and digital transitions and building up defence capabilities.

(24) Regulation (EC) No 1467/97 should therefore be amended accordingly.

(25) In view of the existing deadline under the Stability and Growth Pact, this Regulation should enter into force as a matter of urgency on the day of its publication in the Official Journal of the European Union,

HAS ADOPTED THIS REGULATION:

Article 1

Regulation (EC) No 1467/97 is amended as follows:

(3) Article 4 is replaced by the following: ‘Article 4

(5) in Article 6, paragraph 1 is replaced by the following: ‘1.   When considering whether effective action has been taken in response to its notice made in accordance with Article 126(9) TFEU, the Council shall base its decision on the report submitted by the Member State concerned in accordance with Article 5(1a) of this Regulation and its implementation, as well as on any other publicly announced and sufficiently detailed decisions by the government of the Member State concerned. The outcome of the surveillance mission carried out by the Commission in accordance with Article 10a of this Regulation shall be taken into account.’;

(6) Article 8 is replaced by the following: ‘Article 8

(10) Article 12 is replaced by the following: ‘Article 12

(11) Articles 14 and 15 are replaced by the following: ‘Article 14 In accordance with Article 126(12) TFEU, the Council shall abrogate the sanctions referred to in Article 126(11), first and second indent, TFEU depending on the significance of the progress made by the participating Member State concerned in correcting the excessive deficit.

Article 15

In accordance with Article 126(12) TFEU, the Council shall abrogate all outstanding sanctions if the decision on the existence of an excessive deficit is abrogated. Fines imposed in accordance with Article 12 of this Regulation will not be reimbursed to the participating Member State concerned.’;

(12) Article 16 is replaced by the following: ‘Article 16 The fines referred to in Article 12 shall constitute general revenue for the Union budget.’;

(13) Article 17 is deleted.

(15) the following Article is inserted: ‘Article 17b The Council, on a recommendation from the Commission, shall adopt a revised recommendation under Article 126(7) TFEU or a revised notice under Article 126(9) TFEU to Member States subject to a recommendation under Article 126(7) TFEU or to a notice under Article 126(9) TFEU on 30 April 2024, and that have taken effective action. It shall adopt the revised recommendation or notice together with the adoption of the recommendation pursuant to Article 17 of Regulation (EU) 2024/1263 setting the net expenditure path.’;

(16) the Annex is deleted.

Article 2

This Regulation shall enter into force on the day of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Luxembourg, 29 April 2024.

For the Council The President D. CLARINVAL

(1) Opinion of 23 April 2024 (not yet published in the Official Journal).

(2) OJ C 290, 18.8.2023, p. 17.