European Union Fiscal Rules: It's Already Time to Reform the Reform

Economic

Political

Summary:

The fiscal framework is at risk of unravelling in the face of the heightened geopolitical tensions since Russia’s invasion of Ukraine. To prevent progressive erosion of the framework, the European Commission and EU countries should consider a focused ‘reform of the reform’ to realign it with its original goal: ensuring public debt sustainability based on a risk-based methodology with a limited role for rigid numerical targets.

European Union Fiscal Rules: It's Already Time to Reform the Reform

The European Union’s fiscal framework – a set of rules intended to ensure countries keep their debts manageable – was most recently reformed in April 20241. The reform followed an unprecedented spell of de-facto suspension of the fiscal rules starting in 2020, when countries were given virtually unlimited fiscal leeway to respond to the coronavirus pandemic and subsequently to the energy crisis triggered by the war in Ukraine.

Now, little more than one year on from the reform, the fiscal framework is at risk of unravelling in the face of the heightened geopolitical tensions since Russia’s invasion of Ukraine. To prevent progressive erosion of the framework, the European Commission and EU countries should consider a focused ‘reform of the reform’ to realign it with its original goal: ensuring public debt sustainability based on a risk-based methodology with a limited role for rigid numerical targets.

Risks to the April 2024 reform have arisen in particular for two reasons:

First, activation has been permitted of the ‘national escape clause’ of the Stability and Growth Pact (SGP – the collective term for the EU fiscal framework legislation)2. The activation of the national escape clause, which temporarily eases the fiscal rules, is to allow countries to incur extra defence-related deficit spending (European Commission, 2025). Countries already submitted plans in the autumn of 2024 showing how they would put their spending into sustainable territory over four or seven years; the national escape clause allows them to spend up to 1.5 percent of GDP more for a maximum of four years.

However, activating an escape clause almost as soon as the new fiscal rules begin to apply raises the understandable concern that the rules might not be enforced at all in the next few years. In particular, there are reasons to expect that no new excessive deficit procedures (EDP – a corrective procedure overseen by the European Commission for countries spending beyond the agreed limits) will be opened3 or that existing procedures4 will be escalated (Pench, 2024, 2025). Remarkably, some of the countries with the highest debts, which are the main intended beneficiaries of the escape clause, have so far declined to take advantage of it – in particular France, Italy and Spain. This presumably reflects the perceived risk of falling into a ‘debt trap’ triggered by market reactions, irrespective of whether the rules allow temporary extra borrowing for rearmament.

The second risk factor for the reformed EU fiscal rules is that Germany in March 2025 agreed at record speed a reform of its constitutional ‘debt brake’ fiscal rule, to permanently remove borrowing constraints for defence expenditure (above a 1 percent of GDP floor) and to allow for a one-off €500 billion extra budgetary fund for ‘additional’ infrastructure investment. The new German fiscal posture has been largely welcomed as boosting the economy and addressing neglected spending priorities, at both national and European level5, without risking adverse market reactions.

Although the German move was dictated exclusively by domestic considerations, the Commission can also present it as a vindication of sorts of the national escape clause (Germany has a debt slightly in excess of the maximum of 60 percent of GDP required under the SGP). However, under plausible assumptions, implementing the new German fiscal rule would still run up against the EU fiscal rules, potentially, given Germany’s weight, with repercussions for the whole framework. In particular, extra deficit spending on defence would become problematic beyond the time limit set for the national escape clause. Even in the short term, the EU fiscal rules, which do not permit exemptions for spending on investment programmes, may obstruct deployment of Germany’s infrastructure fund (Steinbach and Zettelmeyer, 2025).

Agreeing on the April 2024 reform of the EU fiscal framework was difficult and it is understandable that the Commission may wish to dismiss concerns about the future of the framework raised by these developments6. In particular, it may be tempted to accommodate the new German posture on fiscal policy – in other words, papering over possible violations of the EU fiscal rules. Allowing Germany to fudge the EU rules to achieve domestic objectives is unlikely to raise strong objections in the rest of the EU, given that an expansionary German fiscal stance would help lift growth across the continent. However, this would compound the doubts on the working of the new fiscal framework raised by the early activation of the national escape clause. In particular, it would rekindle long-standing preoccupations with ‘equal treatment’, bearing in mind that Germany reformed its fiscal rules without any consultation with the EU.

Going back to make it better

Rather than contemplating an early withering of the new EU fiscal framework, the Commission could respond proactively by proposing a surgical ‘reform of the reform’. It could even bring the framework closer to the Commission’s original design (European Commission, 2022a), which was partially overturned in the legislative process because of concern that the consensus necessary for its adoption would not be reached. That worry reflected the traditional German fixation on strict numerical deficit and debt targets. Germany’s own fiscal overhaul thus offers an unexpected opportunity to refocus the EU fiscal framework reform on its original aim, allowing in the process the use of fiscal space where it is available and the elimination of rules devoid of economic justification.

The EU reform’s original aim can be described as the de-risking of national debts, ie the eventual removal of situations in which a country’s public debt poses a high sustainability risk. Rather than requiring debt to hit a target by a certain time or to diminish by a certain amount, the concept of sustainability was long operationalised by the Commission through the development of a specific methodology for assessing medium-term sustainability risk (European Commission, 2023). This combines countries’ projected debt levels with their projected trajectories, suitably stress-tested, to reach an overall conclusion on whether debt presents a high sustainability risk.

With some approximation, the criteria can be described as follows: for countries with debt projected to stay at very high levels – in excess of 90 percent of GDP – the projected debt trajectory should be declining continuously, with a high probability that debt will not rise. For countries with debt projected to stay between 60 percent and 90 percent of GDP, the debt trajectory may rise temporarily, provided that there is a high probability debt will be trending downwards before the end of the projection period. Meanwhile, countries with debt projected to stay below 60 percent of GDP are not deemed high sustainability risks.

The Commission’s sustainability-risk assessment methodology continues to provide the main foundation of the new EU fiscal rules, specifically the requirement for countries’ medium-term adjustment plans to show that debt is on a “plausibly downward” trajectory or will stay “at prudent levels” (Pench, 2023). However, the translation of the methodology into legal requirements accentuated existing rigidities and missed opportunities for clarification. In particular, the April 2024 reform inherited a cumbersome approach to stress testing the baseline debt trajectory; it effectively obliterated any difference between countries with debts projected to stay above 90 percent of GDP and those in the 60 percent to 90 percent range; and it did not factor in the possibility that the debt trajectory may be affected temporarily by time-limited spending programmes, eg on infrastructure.

The reform also introduced unrelated numerical debt and deficit requirements: the so-called ‘debt sustainability safeguard’ and the ‘deficit resilience safeguard’. The latter, requiring countries to eventually reach an arbitrarily set deficit level, results in an unrealistic tightening of the adjustment requirement for countries with very high debts. The former, requiring a minimum pace of debt reduction already during the adjustment period, while the debt exceeds 60 percent of GDP, paradoxically turns out to be potentially penalising not for the countries with very high debts, but for those in the middle range.

‘Surgical’ reform

A targeted revision of the reform to address critical weaknesses would be relatively easy.

First, the risk-based requirements should be reviewed to make them less rigid for countries projected to stay in the middle range of debt (60-90 percent of GDP). For those countries, the requirement could be that debt stabilisation should occur with high probability before the end of the sustainability assessment horizon (ie the period including the four to seven-year medium-term adjustment plan and the subsequent 10-year ‘unchanged policy’ projection)7. In turn, the definition of ‘unchanged policy’ should be tweaked to allow for self-reverting spending programmes, such as the German infrastructure fund, with opportune safeguards against their extension.

Second, the debt sustainability safeguard and the deficit resilience safeguard should be abolished to restore the reform’s underlying sustainability-risk-centred approach. Eliminating the numerical safeguards would be necessary to allow for limited increases in the debt ratios of countries in the middle range, and would avoid disproportionate penalisation of countries with very high debts.

This solution would be preferable to simply raising the Treaty-based debt threshold from 60 percent of GDP to 90 percent (as suggested by eg Steinbach and Zettelmeyer, 2025). Besides the symbolic value attached to the 60 percent threshold, simply replacing it with 90 percent after Germany announced plans to increase its debt would risk creating the impression that the target is being shifted to please the EU’s dominant player.

Impact on Germany

Admittedly, such a surgical reform of the reform would fall short of allowing Germany to exploit all the room for increasing debt implied by its new domestic rules (as estimated by Zettelmeyer, 2025). Germany would still be required to stabilise its debt below 90 percent of GDP and eventually bring it further down towards 60 percent (barring new expenditure programmes). This, however, would confirm the logic of the proposed new reform as not simply accommodating shifting German priorities. It would also reinforce the message that borrowing to finance an expenditure increase, such as for defence, which is expected to be permanent, while politically expedient, is not an economically desirable policy.

The unwillingness shown by the highest-debt countries to profit from the national escape clause suggests that these countries should not be hostile to greater differentiation within the group of countries with debts above 60 percent of GDP. As to the elimination of the two safeguards, the apparent dismissal of these in the application of the national escape clause by the Commission suggests that they are already implicitly recognised as a source of unnecessary and damaging complexity.

The surgical reform could be done through an amendment to Regulation (EU) 2024/1263 of April 2024 (the regulation traditionally referred to as the ‘preventive arm’ of the SGP). This, unlike replacement of the 60 percent of GDP debt threshold, would not need unanimity of EU countries.

Further specification of the risk-based requirements should be done by reference to the Commission methodology (under the control of an ad-hoc working group of EU countries, Commission and European Central Bank representatives), as it is already the case with the current rules.

The methodology should be reviewed to ensure full consistency with the proposed definition of the risk-based requirements and, more generally, to deal with critical issues that the April 2024 reform left unaddressed. In particular, the specifications for the construction of the ‘fan chart’, illustrating the range of possible outcomes around the central adjustment scenario and their probabilities, could be reviewed including in terms of statistical technique, period covered and the operationalisation of the requirement for debt stabilisation with high probability.

来源：bruegel

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Cryptocurrency

Economic

Forex

All about the US Dollar – Market wrap for the North American session - July 15

Today's session has seen some bizarre reactions to an all-around better-than-expected US CPI data – As a reminder US Headline CPI came in almost as expected (0.287 unrounded Headline vs 0.30% expected).

The Core number was however the more welcomed surprise, coming in at 0.2% (0.227%) vs 0.3% expected – This is what the FED prefers for their decisions.Still, an initial slow but upwards reaction got followed by some selloff in Bonds hence higher Yields (unusual when CPI misses, even slightly) and a similar turn in Equities: The Dow started the fall which trickled down to S&P then the more resilient Nasdaq towards the afternoon. These market flows will need to be followed closely as such price action is not a good sign for risk-assets. (Except for cryptos which performed well).As the title explains it, it's all about the US Dollar, which started off more than mixed at the data release, before exploding towards the US Equity Open.

The USD closes higher by around 0.70%, with the DXY hitting monthly highs of 98.70.The Canadian CPI also came out as expected, still up on a year-over-year basis (1.9% vs 1.7% last month) – This unloads further the chances of more rate cuts by the Bank of Canada.Most commodities finish down or mixed as the US Dollar didn't leave much for others on the table – Tomorrow will be key to track if this move as some legs to it.In the meantime, sentiment appears to have taken a hit, at least in terms of Technicals.

Daily Cross-Asset performance

Cross-Asset Daily Performance, July 15, 2025 – Source: TradingView

The winners of the day are the ETH, continuing the past two weeks' trend and the US Dollar from which the rally killed the fun of many other Major currencies (see below) and assets.

Even Bitcoin finished down on the session, but the entire altcoin market did not care too much.

A picture of today's performance for major currencies

All About the US Dollar – Market Wrap for the North American Session - July 15_2

Currency Performance, July 15 – Source: OANDA Labs

The session started very quiet before the US Dollar took back the throne after the publication of the US CPI.One thing however was the relative strength of the Canadian Dollar in this trend which will have to be kept close as EURCAD for example is forming some potentially interesting patterns.Another session, another losing day for the Japanese Yen – its underperformance has been remarkable which may prompt some reactions from the BoJ. In the absence of such, expect the ongoing USDJPY Breakout to continue (Today's session saw the break of a 2-months range).

来源：OANDA

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Risk Warnings and Disclaimers

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Oliver Scott

U.S. consumer prices rose 0.3% in June, marking the largest monthly increase in five months and pushing the annual inflation rate to 2.7% from 2.4% in May.

This acceleration exceeded expectations of a 2.6% annual headline inflation print and highlighted emerging pressures from trade policies, though core inflation still fell short of estimates on a monthly basis.

Excluding food and energy costs, price pressures ticked 0.2% higher month-on-month versus the 0.3% forecast but the annual core reading still rose to 2.9%.

Key Takeaways

● Headline CPI: +0.3% monthly (vs. 0.3% expected), +2.7% annually (vs. 2.4% prior)

● Core CPI: +0.2% monthly (vs. 0.3% expected), +2.9% annually (vs. 2.8% prior)

● Shelter costs: Rose 0.2% monthly, continuing as primary driver of inflation

● Energy sector: Gained 0.9% with gasoline prices up 1.0% for the month

● Food inflation: Increased 0.3% monthly, with food away from home up 0.4%

● Early tariff signals: Price pressures evident in household furnishings (+12.4% annualized), recreation goods (+9.7%), and clothing (+5.3%)

Early evidence of tariff-related price increases appeared in several categories. Fruits and vegetables surged 11.5% on a seasonally adjusted annualized basis, while home furnishings jumped 12.4% with broad-based increases across furniture and appliances.

However, offsetting factors provided some relief. The crucial shelter component, which carries a 40% weighting in core CPI, showed moderation with a 0.2% monthly increase. New vehicle prices declined 0.3% and used cars fell 0.7%, defying expectations of tariff-driven increases in the automotive sector.

The softening in core goods prices, particularly the 0.04% monthly decline excluding vehicles, suggests tariff impacts may be more delayed than initially anticipated. This aligns with historical patterns where tariff effects typically emerge approximately three months after implementation.

The dollar strengthened broadly following the CPI release, with the USD gaining against major currencies as traders scaled back Federal Reserve rate cut expectations.

According to the CME FedWatch Tool, the probability of a July rate cut dropped to just 2.6% from around 6% earlier in the week. September rate cut odds also decreased to approximately 54% from nearly 60%, reflecting market participants’ reassessment of the Fed’s likely policy path.

Price action for the rest of the U.S. session showed the dollar’s resilience, with notable gains against the Japanese yen (+0.82%), euro (+0.77%), and Australian dollar (+0.73%) hours after the CPI release.

Source: BabyPips

Risk Warnings and Disclaimers

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Liam Peterson

Key Points:

● Trump eyeing Brainard for Fed chair amid ongoing discussions.

● Market reactions suggest interest rate changes loom.

● No direct impact on crypto assets confirmed yet.

U.S. President Donald Trump is considering Lael Brainard as a candidate for the Federal Reserve chair position, expressing satisfaction with her current role as Treasury Secretary, according to BlockBeats News on July 16th.

The potential replacement of Jerome Powell with Brainard raises speculation on shifts in U.S. monetary policy. Previous instances when Fed leadership speculated dovish tendencies led financial and crypto markets to adjust for possible rate cuts.

Trump, Fed Chair Shift, and Market Implications

Trump has publicly discussed replacing current Fed Chair Jerome Powell, citing a preference for more dovish monetary policy leadership. Brainard, previously Vice Chair of the Federal Reserve, is recognized for her regulatory expertise.

Speculation on a rate policy shift emerges as Trump favors Brainard, historically known for advocating regulatory measures. This aligns with investor expectations for potential interest rate reductions impacting market sentiment.

"I am actively considering replacing Jerome Powell, and Lael Brainard has been named as a candidate for the next Fed chair," said Donald Trump, U.S. President.

Source: CryptoSlate

Risk Warnings and Disclaimers

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Diana Wallace

Key Points:

● Main event, leadership changes, market impact, financial shifts, or expert insights.

● Votes on digital assets canceled, delaying regulatory clarity.

● Procedural issues stall progress on crypto regulations.

Canceled Vote on Cryptocurrency Bills

The cancellation of the House vote holds significance for the cryptocurrency sector, creating an impact seen in price volatility and market uncertainty.

Canceled Legislative Vote

The planned vote on major crypto legislation was scrapped after a procedural failure. This decision obstructs the progress of the GENIUS Act and Digital Asset Market Clarity Act, initially poised to set the first major US regulatory framework for crypto markets.

Key political figures led to this decision, emphasizing concerns over central bank digital currencies. The potential integration of the three bills into a single vote caused dissent, necessitating a Senate revisit and stalling legislation's momentum.

"The abrupt cancellation of votes has created immediate waves of uncertainty in the crypto market, typically resulting in increased volatility."

Market Impact

Immediate market responses highlight uncertainty and a spike in market reaction, with volatility and shifts in digital asset prices as traders react to legislative ambiguities. Further implications for financial markets and regulatory landscapes remain under scrutiny.

Historical Context

This procedural standstill mirrors prior legislative hindrances affecting digital currencies. Historical instances show temporary asset price downturns and regulatory delays often accompany such events, fostering frustration within the crypto community.

Continued delays in passing necessary regulations prolong market instability. Analysts predict further volatility in crypto markets until progress resumes. Regulatory outcomes seem stalled until new legislative efforts emerge, leaving financial strategies and market actions in limbo.

"We must carefully evaluate the implications of any crypto legislation, especially concerning CBDCs and the potential loss of privacy for our constituents."

Source: CryptoSlate

Risk Warnings and Disclaimers

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Grace Montgomery

China–U.S. Trade War

Claudia Sheinbaum, the President of Mexico, cautioned that the country intends to take strong action against the US if Trump’s new tariff on Mexican imports is not suspended.

She emphasized that a suitable trade agreement must be reached by the August 1 deadline. The announcement came after it pledged to impose a 30% tariff threat on the country’s imports to the US, that is, if it failed to succeed in its mission to put an end to drug cartels.

In a statement, Sheinbaum clarified their motive, stating that they only need a fair agreement with the US. According to her, if it fails to provide one by August 1, they will be forced to take steps that they will inform them about.

Mexico-US trade agreement faces growing uncertainties amid Trump’s tariff threats

Washington had earlier announced plans to impose a 17% duty on fresh tomatoes imported to the US from Mexico. This did not please Mexico’s president. Respondingly, Sheinbaum hoped to make known the measures the country would take, including for tomato farmers, to counter the tariff threat.

Sheibaum stated that they believed they could reach an agreement with the US. However, based on her argument, it was essential to have a backup plan since they needed to get ready for all possibilities.

Notably, Mexico is pivotal in importing fresh tomatoes to the US. According to data from sources, the country imports approximately two-thirds of the fresh tomatoes consumed in the US.

In the meantime, the US Commerce Department announced a cancellation of a 2019 trade agreement with Mexico that ended an investigation on Mexico’s countervailing duty. This amounted to a valuation of $3 billion of Mexican exports to the US annually.

Mexico’s tomato export agreement was first made in 1996, whereby the two governments vowed to control it and resolve US allegations against Mexico concerning “unfair trade” practices. The agreement was updated six years ago to stop an investigation into dumping and settle tariff issues.

On the other hand, Trump is still focused on striking as many trade deals as possible, and he pledges to impose his threatening tariffs on nearly all of his trading partners.

Mexico vows that no other country can substitute Mexican tomatoes in the US market

Following the US’s assertion to withdraw from the tomato agreement with Mexico, Mexico demonstrated strong confidence in renewing the agreement.

The economy and agriculture ministries considered the 17.09% duty on Mexican tomatoes imported to the United States unfairly “underpriced.” Based on their argument, it did not favour Mexican producers and the US industry’s interests.

To curb this, the Mexican government intends to support its tomato farmers and expand its market overseas as it negotiates a deal to strip out the tomato duty.

A coalition of five Mexican agriculture associations, including representatives from Baja California and Sinaloa states, said they would work with the Mexican government to develop more solutions to the problem.

They acknowledged that no other country can substitute Mexican tomatoes in the market, which they have developed through hard work and creativity over the last 120 years.

US Commerce Secretary Howard Lutnick shared his view on the topic of discussion. According to Lutnick, unfair trade practices have hurt their farmers by lowering the prices of their crops, such as tomatoes.

KEY Difference Wire helps crypto brands break through and dominate headlines fast

Source: CryptoSlate

Risk Warnings and Disclaimers

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Daniel Carter

Central Bank

Economic

The U.S. central bank will probably need to leave interest rates where they are for a while longer to ensure inflation stays low in the face of upward pressure from the Trump administration's tariffs, Dallas Federal Reserve Bank President Lorie Logan said on Tuesday.

"My base case is that we'll need to keep interest rates modestly restrictive for some time to complete the work of returning inflation sustainably to the 2% target," Logan said in remarks prepared for delivery to the World Affairs Council of San Antonio.

"It's also possible that some combination of softer inflation and a weakening labor market will call for lower rates fairly soon," she said, noting that tariffs may not push up inflation as much or as persistently as expected, and that slight signs of cooling in recent labor market data along with pessimism among businesses and households could portend a worsening outlook for economic activity.

The Fed has kept its policy rate in the 4.25%-4.50% range since last December. Most policymakers have signaled they want to wait at least a couple more months before resuming rate cuts because they are worried that higher prices from tariffs could undo what has been several months of relatively benign inflation data.

The rise in consumer prices in June suggests that inflation by the Fed's targeted measure -- the 12-month increase in the price index for personal consumption expenditures, which in May was 2.3% -- will "probably move up a bit," Logan said.

"I'd like to see low inflation continue longer to be convinced," she said.

At the same time, the labor market is solid, the stock market is at near all-time highs, and fiscal policy appears set to be a "tailwind" for growth, she said. Earlier this month Congress passed President Donald Trump's domestic policy bill that makes his 2017 tax cuts permanent, among other measures.

"All this adds up, for me, to a base case in which monetary policy needs to hold tight for a while longer to bring inflation sustainably back to target — and in this base case, we can sustain maximum employment even with modestly restrictive policy," Logan said.

Cutting rates too soon, she said, would risk deeper economic scars and a longer road to price stability. Cutting rates too late risks allowing the labor market to weaken more, though the Fed would "have the option of cutting rates further to get employment back on track," Logan said.

For now, Logan said, monetary policy is "well positioned," a phrase that Fed Chair Jerome Powell has repeatedly used to describe the Fed's readiness to act when the data signal it is time.