The European Union's revised economic governance framework, which includes the updated Stability and Growth Pact (SGP), came into effect on April 30, 2024, with its application starting in 2025. This reform seeks to ensure sustainable fiscal positions across member states, deemed essential for maintaining price stability and fostering economic growth within the Economic and Monetary Union.

The revised SGP emphasizes the interdependence of fiscal sustainability, reforms, and investments, advocating for a holistic approach to economic management.

A significant milestone in the implementation of this framework was the submission and endorsement of the first set of national medium-term fiscal-structural plans (MFSPs) by EU member states.

These plans, typically covering four to five years, outline each state's public net expenditure trajectories and detail strategies for investments and reforms addressing key challenges identified in the European Semester review process.

Most member states received endorsement from the EU’s Economic and Financial Affairs Council (ECOFIN) on January 21, 2025, with Italy being among the countries to submit its MFSP.

On March 19, 2025, the European Commission proposed a coordinated activation of the 'national escape clause,' allowing member states to deviate from established expenditure paths to accommodate increased defense spending due to heightened geopolitical tensions.

The clause permits a flexible addition of up to 1.5 percentage points of GDP per annum over a three-year period for defense purposes, should a country request its activation.

However, this flexibility is contingent on maintaining medium-term fiscal sustainability, preventing deviations that would threaten fiscal health.

Member states yet to submit plans will also be eligible for equivalent treatment when invoking the national escape clause.

A review of the MFSPs reveals a mix of fiscal pathways and the associated implications for government debt, growth, and inflation.

The new fiscal surveillance mechanisms replace past approaches by focusing on debt sustainability analysis (DSA), establishing pathways for fiscal adjustment consistent with declining government debt over an adjustment period of typically four years, extendable to seven under specific conditions.

Under the reformed framework, member states are now subject to differentiated fiscal adjustment requirements based on their projected debt trajectories.

The new approach recognizes that fiscal discipline varies through time, mandating larger adjustments for countries with significant debt challenges.

This is contrasted with the previous regime, where convergence to medium-term budgetary objectives had limited differentiation among member states.

In the first round of MFSP submissions, 15 out of 16 euro area countries had their plans endorsed, yet three countries – Germany, Lithuania, and Austria – failed to submit their plans, raising concerns about political backing and the near-term fiscal outlook.

Notably, a minority of countries, including Belgium, Spain, France, Italy, and Finland, have elected to pursue extended adjustment periods by pledging to structural reforms and public investment, which collectively account for a substantial portion of euro area GDP.

The adoption of MFSPs shows variability in compliance with the European Commission’s prior fiscal guidance, with many member states projecting higher cumulative net expenditure growth than previously advised.

A notable risk is evident as countries with elevated public debt levels are required to manage lower average net expenditure growth rates due to high existing primary spending ratios, potentially threatening fiscal targets.

The reforms aim to ensure fiscal adjustments adhere to the 'no backloading' principle, avoiding unanticipated postponement of necessary fiscal measures.

In a parallel assessment of macroeconomic impacts, discretionary fiscal policies introduced in the euro area since the onset of the COVID-19 pandemic are projected to have had a considerable effect on real GDP growth and inflation.

A model-based analysis indicates that while substantial support was provided through various fiscal policies during 2020 and 2021, measures were significantly withdrawn starting in 2022, transitioning to a tighter fiscal stance by 2024. The scale of discretionary fiscal measures indicates a long-term expansionary fiscal impact across the euro area, despite the anticipated fiscal tightening in forthcoming years.

The policy measures, designed to mitigate pandemic effects and address the energy crisis, are further evaluated for their macroeconomic implications, highlighting the sensitivity of these interventions to underlying economic conditions and assumptions.