The EU's Fiscal Rules That Were Meant to Save Europe Are Now Strangling It

The EU's new fiscal framework was meant to be more flexible than its predecessor. Here is why it is failing to accommodate the multiple simultaneous crises European governments now face.

The reformed EU fiscal framework that entered into force in 2024 — replacing the much-criticized Stability and Growth Pact with what was supposed to be a more intelligent, country-specific approach to fiscal discipline — was designed by people who were thinking carefully about the lessons of the 2010-2015 euro debt crisis. What they were not thinking about, because it was not visible on the horizon when the reform was being negotiated, was the compound crisis of 2026: a war-induced energy shock, a defence spending emergency, and ongoing demands from the green and digital transitions, all arriving simultaneously.

The new fiscal framework requires member states with debt above 60 percent of GDP — which includes France, Italy, Spain, Portugal, Belgium, and Greece, among others — to follow country-specific debt reduction paths agreed with the Commission. These paths were calibrated assuming normal economic conditions: modest growth, stable interest rates, and manageable demand for emergency spending.

None of those assumptions currently holds. Growth is weakening as the energy shock bites. Interest rates are potentially rising as the ECB considers its response to inflation. And emergency spending demands have multiplied: energy subsidies for households and businesses, military spending increases under ReArm Europe, and the economic support measures that governments are deploying in response to the crisis.

Several member states have formally requested emergency flexibility provisions under the fiscal framework that would allow them to exceed their agreed deficit paths without facing the enhanced surveillance and potential financial penalties that the framework provides for. The Commission is reviewing these requests against a framework that was written for a different set of circumstances and that provides limited explicit guidance for compound crisis scenarios of the current type.

The political tension is between two legitimate concerns: fiscal discipline that prevents debt dynamics from becoming self-reinforcing and damaging, and the flexibility that democratic governments need to respond to crises that their citizens are actually experiencing.