The Crucial Nexus between the Stability and Growth Pact and the Transmission Protection Instrument

During the past weeks, in various member states of the European Union, an important political debate has (re)emerged regarding the necessity to reduce the level of State indebtedness. This discussion was prompted by statements made by governments of different ideological orientations that, in preparing their medium-term fiscal-structural plans, have warned citizens and parliaments about the likely need to cut certain expenditures and/or raise particular taxes in the future.[1] These comments, which have sparked widespread criticism, have highlighted the requirements posed by the ‘new’ Stability and Growth Pact (SGP) – an economic governance framework that, although less stringent than the previous one, still requires a considerable fiscal response from high-debt EU nations. In the following, we outline the main elements of the ‘new’ SGP, while also explaining why, unlike in the past, it is important for European governments to comply with the euro-unitary fiscal rules, as required by the European Central Bank’s (ECB) Transmission Protection Instrument (TPI).

The ‘new’ Stability and Growth Pact

The sovereign debt crisis (2008-12) led to a significant tightening of the pre-existing economic governance framework, with the setting of stringent and, at least in part, unrealistic budgetary targets. The flaws of these fiscal rules soon became apparent and, only a few months after their implementation, proposals aimed at making the SGP less pro-cyclical and more realistic began to be put forward. These requests intensified over the years in light of stagnating productivity in some countries and because of the need to increase investment to manage significant challenges (in particular, climate change).

At the end of 2022, the European Commission proposed a new economic governance framework, with several important amendments. The model presented by the Commission, although retaining the Maastricht parameters, aimed to move away from strict rules towards more flexible ‘standards’,[2] by setting medium-term budgetary objectives that varied from state to state. The draft implied an important change in the philosophy at the basis of the EU economic governance framework. Unsurprisingly, it soon became the subject of debate within the European chancelleries, with some member countries (above all, Germany) denouncing the risk of experiencing a new widening of public debts. Following the publication of these revisions, European governments agreed on a compromise that, without undermining the overall structure devised by the Commission, considerably reduced the scope of some of the proposed modifications by establishing certain ‘safeguards’ that would reintroduce uniform numerical targets.

In light of the agreement reached by the European Council in December 2023, the new SGP no longer includes the objective of bringing the structural deficit/GDP ratio below 0.5 per cent, just as it sets aside, for high-debt countries, the stringent norm that required states to annually reduce their debt to GDP ratio by 1/20th of the value exceeding the 60 per cent defined under Maastricht.[3] Instead, member states with a high level of indebtedness must agree with the Berlaymont on a multi-annual fiscal plan, which can vary from four to seven years (in case of implementation of specific reforms/investments). These pluriannual paths – as envisaged by the European Commission – consider the net primary expenditure as the main parameter: an indicator which is ‘under the direct’ control of governments, given the fact that it is not affected by economic fluctuations that cannot be weighted ex ante. Nevertheless, unlike the Commission’s initial proposal, the multi-year fiscal plans include predefined numerical targets that significantly ‘stiffen’ the system.

First, it is stipulated that, at the end of the pluriannual path, the structural deficit-to-GDP ratio should register, at least, a margin of 1.5 per cent over the 3 per cent set in the protocol annexed to the Treaty on the Functioning of the European Union. Second, in order to achieve this goal, the states concerned are required to improve, annually, the structural primary balance by 0.4 per cent of GDP (a condition that drops to 0.25 per cent in the case of a time extension). Third, for states with a debt-to-GDP ratio between 60 per cent and 90 per cent, the fiscal trajectory must be structured with the aim of ensuring an annual average reduction of at least 0.5 per cent of the debt/GDP ratio; on the other hand, for states above 90 per cent, the reduction requirement rises to 1 per cent. Fourth, for states with a deficit/GDP ratio above 3 per cent, a minimum annual structural adjustment of 0.5 per cent of gross domestic production is expected.[4]

Given the current geopolitical scenario – and the stark increase in interest rates over recent years – European governments agreed, for the period 2025-27, on a temporary regime that, to a certain extent, allows member states to achieve these targets in a more gradual manner. This provision provides useful wiggle room to countries that, in the aftermath of the pandemic, have experienced a significant deterioration of their public budget indicators, giving additional time to normalise their fiscal stances. However, after this period, these states will still have to meet strict targets – in some cases, never achieved before – that will probably require the adoption of unprecedented economic policies.

The ECB shield

While this SGP continues to be significantly stringent, it could be argued that in the past decade countries that have failed to meet the EU fiscal rules have avoided financial sanctions by the Council, thus being able to continue to deviate from the agreed budgetary parameters. It could therefore be assumed that highly indebted nations could report deviations from their multi-year fiscal plans without suffering any particularly negative consequences. However, the introduction of the ECB’s Transmission Protection Instrument (TPI)[5] now provides a strong incentive for states to comply with the new European budgetary requirements.

The TPI – created in July 2022 and often defined as the ‘anti-spread shield’ – represents an important innovation in the ECB’s toolkit. With this instrument, the Bank has given itself the possibility of acting as a lender of last resort for the Eurozone countries, thus considerably reducing the possibility of experiencing massive speculative attacks such as those seen during the sovereign debt crisis. If, at the economic level, a tool of this kind has long been considered necessary, at the legal level, doubts have historically emerged regarding its compliance with certain provisions of the EU Treaties (such as the prohibition on the direct financing of public budgets laid down in Article 123 TFEU).[6] In this sense, when designing the TPI, the ECB paid particular attention to legal developments of the past decade, taking into account the EU Court of Justice ruling related to the Outright Monetary Transactions and devising certain conditions that must be respected in order to be eligible for purchases of government securities by the European institution. Among the various criteria set, the Bank expressly stated that member countries must be compliant with the EU fiscal framework or have taken effective action in response to an EU Council recommendation under Articles 121(4)[7] and 126(7) TFEU.[8] Therefore, it is reasonable to argue that Eurozone states eager to avoid excessive pressure from financial markets now have a great incentive to comply with the European economic governance framework.[9]

Looking ahead

The EU is facing a complex scenario, and the need to increase investments in order to tackle various significant problems (such as the energy transition) has been highlighted by several observers. Unfortunately, in light of the SGP rules, many member states will have a relatively narrow fiscal margin in the years to come. If the budgetary norms remain as they are – and for a few years, logically, they will – it will become necessary to compensate for the lack of national investment with more spending at the EU level. In fact, a curb on spending in strategic sectors (like defence or technological infrastructures) by large European countries, if not offset by centralised funding, would inevitably generate the growth of internal asymmetries and a significant downsizing of the ambitious goals that the EU has set itself. By tying the hands of member states of primary economic importance and continuing to think on a purely national basis, problems will almost certainly get bigger and Europe will become increasingly marginal in the global scenario.


Matteo Bursi is a Researcher in the Multilateralism and Global Governance Programme of the Istituto Affari Internazionali (IAI).

[1] See Giorgio Leali, “France Plans Eye-Watering €40B in Budget Cuts for 2025”, in Politico Europe, 2 October 2024, https://www.politico.eu/?p=5471358; and Amy Kazmin, “Italy Seeks to Raise More Windfall Taxes from Companies”, in Financial Times, 3 October 2024, https://www.ft.com/content/3e5c6fc2-60fb-4e91-b5f4-1a6dcb9d4ec9.

[2] The shift from rigid rules to standards was suggested by Olivier Blanchard, Alvaro Aleandro, Jeromin Zettelmeyer, “Redesigning EU Fiscal Rules: From Rules to Standards”, in Economic Policy, Vol. 36, No. 106 (April 2021), p. 195-236, https://doi.org/10.1093/epolic/eiab003.

[3] This ‘challenging’ provision was enshrined in the previous version of Council Regulation (EC) No. 1467/97 (Article 2.1 bis) and in Article 4 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the, so-called, Fiscal Compact).

[4] For an in-depth analysis of the SGP reform, refer to Zsolt Darvas, Lennard Welslau and Jeromin Zettelmeyer, “The Implications of the European Union’s New Fiscal Rules”, in Bruegel Policy Briefs, No. 10/24 (June 2024), https://www.bruegel.org/node/10095.

[5] Regarding the TPI, see Matteo Bursi, “A Cross-Sectional Analysis of the Transmission Protection Instrument: Between Economical Needs and Outdated Treaties”, in Federalismi.it, No. 7 (2023), p. 1-14, https://www.federalismi.it/nv14/articolo-documento.cfm?Artid=48551.

[6] “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States […] in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

[7] “Where it is established, under the procedure referred to in paragraph 3, that the economic policies of a Member State are not consistent with the broad guidelines referred to in paragraph 2 or that they risk jeopardising the proper functioning of economic and monetary union, the Commission may address a warning to the Member State concerned. The Council, on a recommendation from the Commission, may address the necessary recommendations to the Member State concerned.”

[8] “Where the Council decides, in accordance with paragraph 6, that an excessive deficit exists, it shall adopt, without undue delay, on a recommendation from the Commission, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period.”

[9] Although some members of the ECB, in the wake of the recent rise in French bond yields, have stated that the requirements announced for the activation of the TPI are primarily an “input” for the decisions of the Governing Council (cfr. Martin Arnold and Mary McDougall, “ECB Faces Speculation over Market Intervention after French Elections”, in Financial Times, 29 June 2024, https://www.ft.com/content/f51c457b-2d3d-4bfa-8860-0a58111492f9), we believe that it would be quite difficult for the Bank to justify from a legal point of view an activation of the TPI in favour of states that openly violate European budgetary rules.