Economic governance framework
Economic governance is a key pillar of the economic and monetary union. It aims to detect and correct economic imbalances that could weaken national economies or affect other EU countries through cross-border spillovers.
What is the EU’s economic governance framework?
Ahead of introducing the euro, the EU established the architecture of an economic and monetary union through the Treaty of Maastricht in 1992.
The economic governance framework refers to a system of institutions and procedures that the EU has set up to coordinate member states’ economic policies and to achieve its economic objectives. The framework comprises an elaborate system of policy coordination and surveillance. It relies on the principles of monitoring, preventing and correcting economic trends that could weaken individual member states’ economies or cause spillovers to other economies.
Effective economic policy coordination and surveillance across the EU offers three main benefits.
It ensures the soundness and sustainability of public finances over the medium and long term for all member states
It promotes sustainable economic growth and convergence
It addresses macroeconomic imbalances, supported by reforms and investments to enhance growth and resilience
Together with the single currency in the euro area and its associated single monetary policy, the EU’s economic governance framework has contributed to economic stability, growth and higher employment.
Reform of the economic governance framework
Since the Maastricht Treaty, the EU’s economic governance framework has gradually evolved. Reforms have been implemented in response to economic crises such as the global financial crisis of 2008.
The recovery from the COVID-19 pandemic and the consequences of Russia’s war of aggression against Ukraine are posing new challenges for the EU economy, against a backdrop of higher debt levels and interest rates and new investment and reform goals. The current framework has also proven to be too rigid in tough times, resulting in member states’ compliance with the rules being uneven.
The EU has therefore further updated its economic governance framework to make it fit for the future. On 29 April 2024, the Council adopted the package of legislation reforming the EU’s economic and fiscal governance framework. The new rules entered into force on 30 April 2024.
The main objectives of the reform are to:
- ensure sound and sustainable public finances
- promote growth through reforms and investments
The new rules also aim to contribute to the EU’s priorities of building a digital, green and more resilient future while strengthening support for its competitiveness and strategic autonomy.
What are the rules?
The EU’s economic governance framework relies on various sets of rules.
Treaty on the Functioning of the EU (TFEU)
It sets reference values for government deficit and public debt levels.
3% for the ratio of the planned or actual government deficit to gross domestic product (GDP) at market prices. 60% for the ratio of government debt to GDP at market prices.
Stability and Growth Pact (SGP)
It defines rules for the monitoring and coordination of national fiscal and economic policies.
The SGP contains both preventive and corrective rules. The SGP applies to all EU member states, but only the countries of the euro area may be subject to sanctions in the ‘corrective arm’.
Six-pack and two-pack
Regulations, which reinforce fiscal surveillance and create the macroeconomic imbalance procedure to ensure oversight of imbalances emerging outside fiscal policies.
Prevention
The Stability and Growth Pact (SGP) contains a fiscal governance framework, also known as the ‘preventive arm’. The preventive arm aims to ensure sound public finances and a sustainable balance of payments and avoid excessive government deficits.
In the yearly European Semester exercise, the EU and its member states carry out a large part of the coordination of their economic and fiscal policies in practice, aligning them with the rules agreed at EU level.
Each member state receives guidance on its economic, budgetary, employment and structural policies from the Council every year. These country-specific recommendations are initially proposed by the Commission and then analysed and discussed by member states’ experts, agreed on by EU economy and finance ministers, before being discussed by EU heads of state and government at the European Council and then formally adopted by the Council.
The agreed reform introduces a tailored approach for each member state, taking account of different fiscal positions, public debt levels and economic challenges across the EU. At the same time, it ensures an overall reduction of debt ratios and deficits to prudent levels in a gradual, realistic and growth-friendly manner. It also ensures effective multilateral surveillance.
Reference trajectory
The Commission sends a risk-based and differentiated reference trajectory, expressed in terms of multiannual net expenditure, to member states in cases where government deficit and debt exceed the reference values of 3% and 60% of GDP respectively. Member states that are compliant with the reference values may request from the Commission technical information regarding the structural primary balance necessary to ensure that their headline deficit is maintained below the 3% of GDP.
The trajectory ensures that, after a fiscal adjustment period, the member states’ government debt is on a plausibly downward trajectory or remains at prudent levels below 60% of GDP over the medium term. In addition, it aims to ensure that any government deficit is brought and maintained below 3% of GDP.
The standard fiscal adjustment period is four years. However, member states may request a longer adjustment period of up to seven years. This extension is permitted if the member state in question carries out reforms and investments that improve resilience and growth potential, support fiscal sustainability and address common EU priorities, such as the green and digital transitions, energy security or the build-up of defence capabilities.
The reference trajectory must comply with two safeguards:
- the debt sustainability safeguard
- the deficit resilience safeguard
The debt sustainability safeguard ensures that the government debt ratio decreases by a minimum annual average of 1% of GDP as long as the member state’s debt ratio exceeds 90%, or of 0.5% of GDP as long as the member state’s debt ratio remains between 60% and 90%. This safeguard does not apply to countries with a debt ratio below 60%. Its purpose is to reduce debt ratios to prudent levels in a gradual and realistic manner.
The deficit resilience safeguard provides a safety margin below the Treaty deficit reference value of 3%. Its purpose is to future-proof national budgets by creating fiscal buffers.
National medium-term fiscal structural plans
Under the new framework, each member state prepares a medium-term fiscal structural plan, spanning four or five years. This plan contains its fiscal, reform and investment commitments, and it contributes to ensuring consistent, gradual debt reduction and promoting sustainable and inclusive growth.
Based on their reference trajectory or technical information, member states incorporate their fiscal adjustment path, expressed as a net expenditure path, into their national medium-term fiscal structural plan.
These plans and net expenditure paths must be endorsed by the Council, further to an assessment by the Commission. If a member state requests an extension of the adjustment period, the set of reform and investment commitments underpinning that extension must also be endorsed by the Council.
If a member state’s national medium-term fiscal-structural plan does not comply with requirements, the Council recommends that the member state submit a revised plan.
The Commission uses a control account to monitor member states’ cumulative upward and downward deviations from their agreed net expenditure paths.
Net expenditure indicator
In order to simplify the EU’s fiscal framework and increase transparency, a single operational indicator anchored in debt sustainability serves as a basis for setting the net expenditure path and for carrying out annual fiscal surveillance for each member state: the net expenditure indicator.
It is based on nationally financed net primary expenditure, i.e. expenditure excluding discretionary revenue measures, interest expenditure, cyclical unemployment expenditure, national expenditure on co-financing of programmes funded by the EU, and expenditure on EU programmes fully matched by revenue from EU funds.
The net expenditure indicator allows for macroeconomic stabilisation as it is not affected by automatic stabilisers, including revenue and expenditure fluctuations outside the direct control of the government.
Annual progress report
The new framework introduced an annual progress report, in which each member state provides information on the implementation of its national medium-term fiscal-structural plan, including the net expenditure path, as well as progress on reforms and investments.
Escape clause
The rules provide for the possibility of activating a general escape clause, thereby suspending the rules for all member states in the event of a severe economic downturn in the euro area or the EU as a whole, provided that doing so it does not endanger fiscal sustainability in the medium term. Activation of the clause has a one-year time limit, but this may be extended.
Under the new rules, a national escape clause may be activated by the Council if this is requested by a member state and recommended by the Commission. This would suspend the rules only for the member state concerned, in the event that exceptional circumstances outside the control of that member state have a major impact on its public finances. This clause is activated only if doing so does not endanger fiscal sustainability in the medium term, and the Council specifies a time limit for its activation period.
On 8 July 2025, the Council activated the national escape clause for 15 member states: Belgium, Bulgaria, Croatia, Czechia, Denmark, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia and Slovenia. On 10 October 2025, the Council also activated the clause for Germany.
The aim is to help facilitate their transition to higher defence spending at national level while ensuring debt sustainability.
Enforcement
Member states must avoid excessive government deficits and debts, in line with the Treaty on the Functioning of the EU (article 126(1) TFEU). In practice, this means that member states should not exceed the reference values of 3% deficit ratio and 60% debt ratio.
The rules for enforcement in this area are set out in the corrective arm of the SGP. These rules are to be strengthened under the new economic governance framework.
Excessive deficit procedure
The objective of the excessive deficit procedure (EDP) is to ensure budgetary discipline. This aims to:
- deter excessive government deficits and, if they occur, to encourage their swift correction
- gradually reduce debt in a sustainable manner, until debt is brought below the Treaty reference value of 60% of GDP
The EDP on the basis of the deficit criterion requires a minimum annual structural adjustment of 0.5% of GDP. Non-compliance may result in fines of up to 0.05% of GDP, and have to be paid by the member state concerned every six months until the Council confirms that effective action has been taken. The Commission considers initiating a deficit-based EDP if the ratio of government deficit to GDP exceeds the reference value of 3%.
Under the new rules, the focus of the debt-based EDP is on departures from the net expenditure path. This means that the ratio of government debt to GDP is considered to be diminishing sufficiently and approaching the reference value at a satisfactory pace if the member state concerned respects its net expenditure path. The Commission considers initiating the debt-based EDP if the deviations recorded in the control account of the member state exceed either 0.3% of GDP annually or 0.6% of GDP cumulatively.
When evaluating a member state’s compliance with the deficit and/or debt criteria, the Council and the Commission assess various relevant factors. These include:
- severity of the deviation
- progress on implementing reforms and investments
- degree of public debt challenges
- increased defence spending (if applicable)
The Commission regularly evaluates whether effective action has been taken by the government concerned, and issues a recommendation to the Council. It is then up to the Council to decide whether sanctions can end, or whether they should continue and/or be intensified.
Last review: 10 October 2025