Europe: Austerity Fiscal Operations Will Continue in 2025
2024-12-05
■ Nine countries did not meet the standards in evaluating the 2025 budget proposal, and the entire eurozone is expected to implement austerity policies.
■ In France, which met the European Commission's standards, budget negotiations broke down, and the possibility of a general cabinet resignation increased.
On November 26, the European Commission announced the results of the "European Semester" autumn package as the 2025 budget approval process. This time, the budget proposal for the first year of the medium-term plan was evaluated under the new economic governance framework that came into effect on April 30. The primary purpose of the latest economic governance framework is to promote structural reforms and investments to improve the sustainability of fiscal and economic growth. To avoid a vicious cycle of requiring austerity policies in response to fiscal deterioration in the event of an economic crisis, the framework allows for temporary spending expansion while requiring a plan to converge to the standards of the Stability and Growth Pact (fiscal deficit: within 3% of nominal GDP, debt balance: within 60% of nominal GDP) in the medium term to ensure fiscal discipline.
The assessment of the 2025 budget proposals based on the autumn economic forecast prepared by the European Commission showed that*1 the Netherlands violated the standards (the net fiscal expenditure growth rate in 2025 and the cumulative period of 2024-2025 violated the standards), Lithuania was at risk of violating the regulations (although it did not submit a medium-term fiscal plan, it was expected that the net fiscal expenditure growth rate in 2025 and the cumulative period of 2024-2025 would violate the standards), and seven countries including Germany and Portugal were found to have partial violations. Among the seven countries with partial violations, four countries, including Germany, violated the standards in terms of the net fiscal expenditure growth rate in 2025 or the cumulative period of 2024-2025, and three countries, including Portugal, violated the standards due to the postponement of the gradual elimination of energy support measures before this winter (winter 2024-2025). Eight countries, including France and Italy, were assessed to meet the standards. France, Italy, and Slovakia's fiscal deficit (as a percentage of nominal GDP) exceeded 3%. However, in the "European Semester" (Spring Package) in the spring of this year, it was recommended to take corrective measures in June, namely the "Excessive Deficit Procedures (EDP)," which were recognized in this budget as being in line with the "reference track" of the fiscal adjustment period suggested by the European Commission. Moreover, for the entire euro area, austerity fiscal operations will be implemented in 2025 after 2024, and the fiscal deficit (as a percentage of nominal GDP) is expected to shrink slightly by 0.25%. Although public investment, including digital and green investments, will increase, fiscal spending will be suppressed due to recurrent expenditures and reductions in government subsidies.
The above is the assessment of the European Commission, and each member state needs to go through procedures such as parliamentary approval to pass the budget. In France, the opposition parties, which hold a majority of seats in the National Assembly, opposed some budget-related bills and proposed a motion of no confidence in the cabinet that forced a vote. It is expected that a motion of no confidence in the cabinet will be passed, bills forced to vote will be repealed, and political stability and confidence in finances will be greatly shaken.
■ In France, which met the European Commission's standards, budget negotiations broke down, and the possibility of a general cabinet resignation increased.
On November 26, the European Commission announced the results of the "European Semester" autumn package as the 2025 budget approval process. This time, the budget proposal for the first year of the medium-term plan was evaluated under the new economic governance framework that came into effect on April 30. The primary purpose of the latest economic governance framework is to promote structural reforms and investments to improve the sustainability of fiscal and economic growth. To avoid a vicious cycle of requiring austerity policies in response to fiscal deterioration in the event of an economic crisis, the framework allows for temporary spending expansion while requiring a plan to converge to the standards of the Stability and Growth Pact (fiscal deficit: within 3% of nominal GDP, debt balance: within 60% of nominal GDP) in the medium term to ensure fiscal discipline.
The assessment of the 2025 budget proposals based on the autumn economic forecast prepared by the European Commission showed that*1 the Netherlands violated the standards (the net fiscal expenditure growth rate in 2025 and the cumulative period of 2024-2025 violated the standards), Lithuania was at risk of violating the regulations (although it did not submit a medium-term fiscal plan, it was expected that the net fiscal expenditure growth rate in 2025 and the cumulative period of 2024-2025 would violate the standards), and seven countries including Germany and Portugal were found to have partial violations. Among the seven countries with partial violations, four countries, including Germany, violated the standards in terms of the net fiscal expenditure growth rate in 2025 or the cumulative period of 2024-2025, and three countries, including Portugal, violated the standards due to the postponement of the gradual elimination of energy support measures before this winter (winter 2024-2025). Eight countries, including France and Italy, were assessed to meet the standards. France, Italy, and Slovakia's fiscal deficit (as a percentage of nominal GDP) exceeded 3%. However, in the "European Semester" (Spring Package) in the spring of this year, it was recommended to take corrective measures in June, namely the "Excessive Deficit Procedures (EDP)," which were recognized in this budget as being in line with the "reference track" of the fiscal adjustment period suggested by the European Commission. Moreover, for the entire euro area, austerity fiscal operations will be implemented in 2025 after 2024, and the fiscal deficit (as a percentage of nominal GDP) is expected to shrink slightly by 0.25%. Although public investment, including digital and green investments, will increase, fiscal spending will be suppressed due to recurrent expenditures and reductions in government subsidies.
The above is the assessment of the European Commission, and each member state needs to go through procedures such as parliamentary approval to pass the budget. In France, the opposition parties, which hold a majority of seats in the National Assembly, opposed some budget-related bills and proposed a motion of no confidence in the cabinet that forced a vote. It is expected that a motion of no confidence in the cabinet will be passed, bills forced to vote will be repealed, and political stability and confidence in finances will be greatly shaken.