Questions and Answers Before Possible EU Deficit Procedure

For a long time, Austria was considered a frugal model student in Brussels. However, the tide has turned: In June, the EU Commission recommended an EU deficit procedure, which the EU finance ministers will decide on Tuesday. The Republic is incurring more debt than allowed. The deficit was 4.7 percent in 2024 and 4.5 percent of GDP this year, clearly above the allowed Maastricht limit of three percent. It must be brought back under three percent.

Why does the EU intervene in cases of excessive debt?

Misdevelopments in economic policy can have repercussions on all member states. To recognize these early and to be able to counteract them, there is the so-called European Semester, a monitoring and coordination process. The rules for this process are laid down in the Stability and Growth Pact. It is the framework for the coordination and monitoring of the financial policy of the individual EU countries.

It consists of a so-called preventive and a corrective arm. The preventive part is intended to ensure budgetary discipline and thus prevent excessive deficits. If there is still an excessive deficit in a member state, the corrective arm comes into play. In cases of excessive debt, a deficit procedure can be initiated to reduce excessive national debt.

What deadlines need to be observed?

The EU Commission prepares a report in which an excessive deficit is identified. In a second step, the Council of EU finance ministers must approve the Commission's assessment, which is expected to happen on Tuesday. The EU Commission provides deficit offenders with a path on how they can reduce debt in the coming years. This reference path covers a period of four years, which can be extended to up to seven years upon request of a state for corresponding reform and investment projects.

According to the Council recommendation proposed by the Commission, Austria is given a deadline until October 15, 2025, to take action and present the necessary measures. "After that, Austria should report on the progress in implementing this recommendation at least every six months, namely in the spring as part of its annual progress report and in the fall in the draft budget plan, until the excessive deficit has been corrected," it continues. Austria should therefore eliminate the excessive deficit by 2028.

What is the government's stance?

Above all, the ÖVP of Federal Chancellor Christian Stocker has long tried to avoid an EU deficit procedure. However, Finance Minister Markus Marterbauer (SPÖ) recently emphasized that he is not afraid of the procedure and that it is not a Damocles sword over Austria. The procedure "essentially means that we present a reduction plan to the Commission and continuously exchange information," such as the fiscal structure plan. The fact that some on the political level speak of "administration" has "nothing to do with reality."

The budget deficit is expected to decrease to 4.5 percent of GDP this year and amount to 4.2 percent next year. By 2028, the government aims to exit the EU deficit procedure. The consolidation amount is expected to be 6.4 billion this year and 8.7 billion next year. According to Marterbauer, about one-third is on the revenue side, the rest on the expenditure side.

What are the advantages of a deficit procedure?

Wifo head Gabriel Felbermayr and IHS director Holger Bonin have advocated for an EU deficit procedure against Austria instead of a radical austerity course, so that the economy is not stifled. A deficit procedure generally offers more flexibility when extraordinary economic or financial crises occur (e.g., recession, natural disasters, or unexpected geopolitical tensions). In such cases, the EU allows a country to temporarily exceed the deficit to stabilize the economy and take necessary economic measures. A strict limitation would create additional burdens in such times, as the country might be forced to make cuts or increase taxes during a crisis, which could slow down recovery.

Are there sanctions if requirements are not met?

Under a deficit procedure, sanctions can be imposed on a deficit offender if they do not meet the requirements to correct an excessive deficit. In case of non-compliance, fines amounting to billions could be due - although this has never happened.

Is Austria the only EU deficit offender?

No, quite the opposite. In June 2024, the EU Commission initiated an EU deficit procedure against seven countries. Among them were France and Italy - the second and third largest economies within the European Union. In addition to France and Italy, Belgium, Hungary, Malta, Poland, and Slovakia are also affected. A procedure is also pending against Romania.

For Austria, this is the second EU deficit procedure. The first was initiated in the aftermath of the financial and economic crisis of 2008.

(APA/Red)

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