Austria Braces for Excessive Deficit Procedure as EU Commission Takes Action
A Tough Road Ahead for Austria
EU Commission Initiates Fiscal Discipline Procedures Against Austria
The European Commission has announced its intention to initiate an infringement procedure against Austria due to its excessive new debt. This comes as no surprise, as Austria is projected to incur debts this year equivalent to 4.4% of its GDP, surpassing the allowed limit under debt rules.
The European Commission validates that Austria has an excessive deficit, a role dedicated to enforcing EU debt rules. The deficit procedure aims to guide nations towards sound financial management. Austria's public deficit peaked at 4.7% of its economic output last year, amidst an economic crisis marked by high inflation, weak consumer demand, and persistent recession. According to the EU Commission's forecast, Austria will be the only EU member experiencing economic contraction this year. The country expects to take on new debts amounting to 4.4% of its GDP, resulting in a total debt of 84% of its GDP. The current government aims to cut state spending by a total of €54 billion by 2029.
The Politics behind the Deficit
The EU Commission monitors compliance with the budget deficit and public debt rules for all member states. The European debt rules allow a maximum new debt of three percent of GDP. The next step in the procedure against Austria will involve statements from the Economic and Monetary Affairs Committee. Following this, the Commission will confirm the existence of an excessive deficit and propose deficit reduction recommendations to the EU finance ministers.
Vienna Braced for the Procedure
Austria's conservative ÖVP, Social Democratic SPÖ, and liberal NEOS government, who have already hinted at the possibility of a deficit procedure, are ready for the move. The previous government, composed of the ÖVP and the Greens, implemented costly support measures to counter the impacts of the COVID-19 pandemic and the Ukraine war. Additionally, various environmental subsidies were implemented.
If an infringement procedure is initiated, a country must take countermeasures to reduce debt and deficit. This move aims to secure the stability of the eurozone, although penalties of billions for persistent violations are theoretically possible, but have never been imposed in practice.
The Rest of Europe
The deficit procedures were temporarily suspended due to the COVID-19 crisis and the consequences of the Russian attack on Ukraine. Last year, the Commission also initiated procedures against France, Italy, Belgium, Hungary, Malta, Poland, and Slovakia. However, no further steps are currently required in the procedures against most of these countries, according to the Commission's announcement. A procedure is ongoing against Romania.
What's Next for Austria?
The challenges Austria faces, such as recession, high inflation, weak consumer demand, and persistent recession, will require stern measures to overcome. The deficit reduction measures being implemented, including fiscal consolidation, energy subsidies and tax reforms, and fiscal discipline, aim to stabilize the country's economy and comply with the EU's fiscal guidelines. The specific involvement of the EU Commission's procedure in Austria's strategy remains to be seen.
- Austria
- EU Commission
- Deficit
Insights:
- Current Economic Challenges in Austria: The Austrian economy is expected to contract by 0.3% in 2025, with stagnant consumption and declining investment exacerbated by high energy prices and rising unit labor costs.
- Industrial Sector: The industrial sector is facing loss of cost competitiveness and declining industrial production, which fell by 5.4% in 2024.
- Unemployment and Inflation: Unemployment is increasing moderately, and inflation remains above 2%.
- Deficit Reduction Measures: To address these challenges and comply with the EU's fiscal guidelines, Austria is implementing several deficit reduction measures, including fiscal consolidation, phased withdrawal of energy subsidies, tax reforms, and fiscal discipline. These measures aim to reduce the budget deficit from 4.7% of GDP in 2024 to 2.9% in 2025, enhance fiscal sustainability, and stabilize public debt at around 78% of GDP.
- The Austrian government is bracing for an infringement procedure from the EU Commission due to their excessive new debt, which violates EU debt rules.
- This deficit procedure highlights the need for the Austrian government to implement strict deficit reduction measures, such as fiscal consolidation, energy subsidies, and tax reforms, to comply with the EU's fiscal guidelines and stabilize the country's economy.
Austria, EU Commission, deficit, fiscal consolidation, energy subsidies, tax reforms, fiscal discipline
