Is It Time to Repay Debt After the Pandemic?

A reform of EU debt rules is on the horizon, so the question will be in which direction Central Eastern Europe can swing it. 

woman throwing banknotes in air debate on future of european union
The debate on the future of the EU’s fiscal rules is set to start. Photo: iStock.com / Simon Skafar

Thirty years after the EU adopted the Maastricht Treaty, the COVID-19 pandemic brought the most intense shake-up of the bloc’s fiscal rules so far. To to help member states cover the costs associated with furloughed workers, countries were temporarily allowed by the EU to spend way beyond their means.

As the pandemic is about to subside, the debate on the future of the EU’s fiscal rules is about to return with increased strength. It is worth posing the question of which positions the countries of Central Eastern Europe (CEE) will take in the upcoming showdown on state debt in the EU.

The pandemic of debt

First, it is necessary to remind the reader about the finer details of the Stability and Growth Pact (SGP) that the EU deemed vital for its 27 member states to adopt in 1997. The pact’s goal was to provide stability for the Economic and Monetary Union (EMU) that would pave the way for all member states’ long-term goal to adopt a common currency, the Euro. The pact outlined the government deficit and debt-to-GDP ratio limits, placing them at 3% and 60% of GDP, respectively.

However, many EU states have been breaching the rules for years, taking on more significant debt than the SGP allows. The question of the role state debt plays in the economic balancing act that all states must decide on is crucial. As for private individuals, it can be good for a state to take on some debt to finance necessary investments, but too much can lead to a default.

EU debt reform

According to the European Commission, the states in Central Eastern Europe are all below the EU average debt-to-GDP ratio, which increased from 77.2% at the start of the pandemic to 92.9% at the beginning of 2021. In Q1 2021, Estonia had the lowest figure in the EU, standing at 18.5%, while Croatia had the highest figure in the Three Seas region, reaching 91.3%. The differentiation in debt levels among CEE states is likely to influence their stance on which path the EU should take next.

Unlike after the financial crisis of 2007-2008 and the ensuing Eurozone crisis, austerity measures have not been embraced by most states following the COVID crisis. Instead, almost all states have met the challenge by taking on more debt. The European Union sanctioned the practice by freezing the SGP rules until the end of 2023.

Eurozone’s historical low

In late 2021, French President Emmanuel Macron and Italian Prime Minister Mario Draghi penned a joint article in which they called on the EU to increase the SGP limits once it returns in 2024. However, four of the Three Seas states, Austria, Czechia, Slovakia, and Latvia, opposed this idea and were among the 8 EU countries that signed a position paper in September 2021 against the plan. Most other Three Seas states are still on the fence and are expected to make their stance clear as the EU debates the issue in the coming months. 

The opponents of maintaining the SGP rules as they were, until the pandemic, instead of stress that long-term interest rates in the Eurozone are at a historical low, between 0% and 3%. This means that servicing public debt costs very little, even with higher debt levels. Whichever path the debate on SGP reform takes, all Central Eastern European states can comfort that their comparably low debt-to-GDP ratios will mean that they will not be the main actors in the spotlight of the EU’s frugal forces.

Filip Rey

Filip Rey comes from a Polish family that left the country following the outbreak of the Second World War and settled in Switzerland after a short interlude in Paris. Filip returned to Poland for his university studies in 2014 in order to better get to know the country of his grandparents. He specializes in International Relations and Security Studies, applying his knowledge within those fields to analyze the geopolitics of Central Eastern Europe

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