The European Commission announced on Wednesday (April 30th) that as of now, 12 member states have formally applied to activate the “General Escape Clause” in the Stability and Growth Pact (SGP) in order to expand defense spending without being constrained by the fiscal deficit limits, to respond to the increasingly serious geopolitical challenges.
According to this measure, the applying countries can increase their defense budgets to the equivalent of 1.5% of their Gross Domestic Product (GDP) annually within the next four years, even if this leads to a fiscal deficit exceeding 3% of GDP, it will not trigger sanctions.
The countries that have already applied for this clause include Belgium, Denmark, Estonia, Finland, Germany, Greece, Hungary, Latvia, Poland, Portugal, Slovakia, and Slovenia. It is expected that more countries will join the application process in the future, as many member states have expressed interest in utilizing this fiscal flexibility mechanism.
On March 11th this year, Valdis Dombrovskis, the Vice-President of the European Commission for Economy, revealed in a press conference that the EU is actively planning new policy measures related to defense expenditure. One of the key focuses is coordinating the activation of the “General Escape Clause” to expedite the pace of member states strengthening their defense while maintaining fiscal prudence.
The well-known Stability and Growth Pact of the EU theoretically limits member states’ annual budget deficits to no more than 3% of GDP and requires that national debt be below 60% of GDP.
The “General Escape Clause” was first extensively used during the COVID-19 outbreak in 2020. From 2020 to 2023, the EU suspended the deficit limits for all member states, allowing them to raise additional debt to revive the economy and livelihoods during the pandemic, demonstrating the flexibility and adaptive capacity of EU fiscal norms in times of major crises.
This recent activation of the clause is mainly in response to the security threats posed by Russia’s invasion of Ukraine. This war has led countries to increase defense budgets, exacerbating public finance pressures.
Although NATO has urged all member states to increase defense spending to 2% of GDP, many European countries have long failed to meet this target. However, after the outbreak of the Russia-Ukraine conflict, the security situation in Europe deteriorated, prompting countries to initiate policies for military expansion and modernization.
Germany declared a “turning point in the era” policy three days after the outbreak of the war, establishing a €100 billion special defense fund and increasing defense spending to over 2% of GDP in 2024. In January 2023, France passed the “2024-2030 Defense Planning Act,” with a total amount of €413 billion, setting a record high since the Fifth Republic. Poland passed the “Homeland Defense Act” in 2022, planning to raise defense spending to 3% of GDP and expand the armed forces to 300,000 active personnel.
The European Commission will evaluate the current applications and present recommendations in the Spring 2025 European Semester for the EU Council to deliberate. The final decision is expected to be made within a month after the recommendations are put forward.
The “European Semester” is currently one of the EU’s main mechanisms for coordinating member states’ economic policies. The basic procedure involves each member state formulating fiscal plans for the coming year during the “Spring Semester” within the “academic year” and implementing these plans during the “Autumn Semester.” The European Commission conducts a detailed analysis of each member state’s macroeconomic, budgetary plans, and structural reform needs annually, providing guidance for the next 12-18 months.