EU fiscal board: Exceptions to new EU fiscal rules put credibility at risk

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By Jan Strupczewski

BRUSSELS, Sept 21 (Reuters) - The European Union's fiscal watchdog criticised EU institutions on Monday for using too much discretion and flexibility in applying the EU's new fiscal rules, as markets globally focus on debt sustainability because of expectations of a rate-tightening cycle.

The independent European Fiscal Board warned in a report that repeated exceptions to the rules, granted by the Commission and the Council of EU governments to EU countries and designed to gradually bring down debt, risked undermining the credibility of the rules not long ago after they entered into force.

Under the rules, which entered into force in April 2024, each EU country agrees an individual, tailor-made annual debt reduction path with the Commission. It has between four and seven years to cut deficit and debt towards the EU's limits of 3% and 60% of gross domestic product respectively.

If the government does not deliver on the agreed path, it has to explain why, or face a disciplinary procedure.

"No statements under the comply-or-explain rule ... were issued, and only one country faced procedural consequences in the form of a new excessive deficit procedure," the EFB said, in reference to Bulgaria.

"This contrasts with a shortfall of fiscal outcomes and projections from the recommended expenditure paths. The gap reflects both flexibility under the new rules as well as discretion and forbearance on the part of the Commission and the Council," the EFB said.

The fiscal watchdog said that whenever governments faced pressure to spend more, like on defence or to counter high energy prices, EU institutions agreed to create an exception.

"Every such exception may seem reasonable from a political perspective, but rules are judged in the accumulation of precedent, and a framework that bends with each new shock risks losing its ultimate purpose," said EFB Chair Pieter Hasekamp.

The exemptions, first offered in March 2025, take the form of National Escape Clauses (NECs), which allow temporary departures from fiscal targets to accommodate higher spending. One was used for defence, and another, in 2026, to cover some energy-resilience measures.

The criticism comes as EU countries face mounting pressure to increase spending on defence, energy security and the green transition while also coping with rising debt servicing costs after years of elevated borrowing.

The report found that, despite stronger-than-expected economic growth in 2025, fiscal positions across the EU improved far less than envisaged in countries' fiscal plans. EU government debt rose to 82% of GDP in 2025 from 81% a year earlier, according to Eurostat, and the Commission forecasts it will exceed 84% in 2026.

(Reporting by Jan Strupczewski; Editing by Aidan Lewis)