EU eases spending rules to tackle energy shock

The EU on Wednesday eased its spending rules to help member states confront the energy shock sparked by the Middle East war, as back-to-back crises leave countries in a fiscal squeeze. The EU executive added Bulgaria to a growing list of countries in the public spending sin bin over their mushrooming deficits as it published views on each country's fiscal health, reported Agence France-Presse. The European Union's second and third biggest economies, France and Italy, have already been handed formal reprimands alongside eight other member states. Under EU rules, the public deficit — when government revenue is not enough to cover spending — must not be above three per cent of gross domestic product.

The rules were suspended during the coronavirus pandemic, and then again during the energy crisis that followed Russia's 2022 invasion of Ukraine — both of which piled massive pressure on European nations' finances. A reformed set of spending rules kicked into force in 2024, and in theory member states risk fines for violations, though the EU has never gone so far, according to Agence France-Presse.

With energy prices soaring again because of the Middle East war, the EU on Wednesday said it would grant some fiscal leeway to help member states manage. Italian Prime Minister Giorgia Meloni had demanded that, as has been done for defence spending, governments be allowed to exempt spending on measures that limit the impact of higher energy prices. Explaining the move, which comes after initial EU resistance to Meloni's demand, economy chief Valdis Dombrovskis said: "We see that the energy crisis is more protracted than initially envisaged."

Brussels will give member states space to spend up to 0.3 per cent of GDP per year, up to a total of 0.6 per cent until 2028, to support measures aimed at cutting the use of fossil fuels. Measures such as fuel excise tax cuts undertaken by Rome in March would not be included in the exemption. But the picture otherwise looks better for Italy than for other major EU economies, with a deficit expected to fall to 2.9 per cent in 2026 and 2027. The expectation was that Rome would see its deficit below three percent in 2025, but an economic slowdown late last year dashed such hopes.

Just months after joining the eurozone single currency area, the European Commission rebuked Bulgaria for violating the EU's spending rules. Brussels said opening an excessive deficit procedure against Bulgaria was "warranted". The procedure kickstarts a process forcing a country to negotiate a plan with Brussels to get their deficit levels back on track. It will not be a surprise to Sofia. Its new prime minister, Rumen Radev, has warned about the deterioration of public finances. According to the latest EU economic forecast published last month, Bulgaria's deficit is expected to reach 4.1 per cent this year after 3.5 per cent in 2025.

Germany, Europe's largest economy, has long championed maintaining fiscal discipline but will breach the EU's three-per cent deficit ceiling this year, hitting 3.7 per cent of GDP and rising to 4.1 percent next year. Luckily for Germany, it escaped public rebuke because of the exemption granted for defence spending, which the country has ramped up in the wake of Russia's Ukraine invasion.

Germany's deficit would have stood at 2.9 per cent in 2026 without the increase in defence expenditure, according to the EU. France's budget woes do not seem to end. Paris hopes to keep its deficit at five percent of GDP this year, despite new spending measures to mitigate the impact of oil prices on certain sectors. The commission welcomed France bringing down the deficit to 5.8 per cent of GDP in 2024 to 5.1 per cent of GDP in 2025. But the commission warned last week that France would have the bloc's biggest budget deficit — a whopping 5.7 per cent — in 2027, a crucial presidential election year, if policies remain unchanged.