Poland, Hungary and Slovakia are set to be put under the European Union’s Excessive Deficit Procedure (EDP), following a European Commission analysis of their budget deficits published on June 19. 

The Commission move could open a new front in the battle between Central Europe's populist governments and the EU. Hungary's and Slovakia's populist governments have thumbed their noses at the Commission's advice over their budgets – notably by prolonging energy subsidies long after the price shock following the Russian invasion of Ukraine –  while Poland's new centrist government is wrestling with the legacy left by its populist predecessor.

“At a time when Europe and national governments are facing increasing support for populist parties, with often highly expensive economic policy proposals, the EDP announcements could add to political tensions,” ING said in a note. “Eventually, it could also lead to tensions within the monetary union if one or more member states do not comply with the proposed correction path.”

From Central and Eastern Europe (CEE), Czechia and Estonia also breached the Stability and Growth Pact’s threshold of a budget deficit of 3% of gross domestic product (GDP) 3% in 2023, and Slovenia may do so this year, but they escaped sanction because their excessive deficits are viewed as either temporary or caused by extraordinary one-off factors. 

Slovenia was excused partly because floods earlier this year cost 1.7% of GDP, according to government estimates, and its deficit will return under 3% of GDP next year. 

Czechia’s deficit is viewed as only temporary as it is forecast to fall below 3% this year after an austerity package passed last year worth an estimated 1.5% of GDP.

Estonia was forgiven, even though its deficit will still be above the threshold next year, because it is still struggling to emerge from a three-year recession.

Romania,  whose deficit is expected to be above the 3% limit in 2023 and in 2024, is already under the EDP. The Commission said that Romania had taken no effective action in response to the Council recommendation on its deficit of 18 June 2021.

Three CEE states – Hungary, Croatia and Slovenia – also breached the secondary threshold of having public debt of more than 60% of GDP.

According to the report – which did not cover RomaniaHungary, Poland and Slovakia breached the 3% budget deficit threshold in 2023 and are expected to continue to do so in 2024 and 2025.

The Polish budget deficit hit 5.1% of GDP in 2023 and the Commission expects it to widen still further to 5.4% in 2024 before going down slightly to 4.6% in 2025.

Poland tried to claim exceptional reasons for this because of the ramp-up in its defence spending – a new factor that can be taken into account in the Stability and Growth Pact – though the Commission decided it should nevertheless still enter the EDP. 

Polish defence spending is set to become the highest in terms of GDP in the EU. It was 2.1% of GDP in 2023 and the government expects it to reach 2.8% in 2024, 3.2% in 2025, 3.7% in 2026, 4.3% in 2027 and 4.1% of GDP in 2028.

Hungary has long had one of the worst deficit and debt records among the CEE member states. Hungary was previously under the EDP from 2004 to 2013 for continuously overshooting the deficit. It is now set to re-enter the EDP after Hungarian strongman Viktor Orban splurged to win the April 2022 election and his government failed to subsequently rein in spending sufficiently.

Hungary’s 2023 budget gap of 6.7% exceeded the government’s original target by some 3pp and in the absence of further measures, the Commission projects it to remain elevated at 5.4% of GDP in 2024 and decelerate to 4.5% in 2025, both figures above the government's latest forecasts. Public debt fell 0.5pp in 2023 to 73.5% of GDP. 

Slovakia was singled out as an “aggravated” case because the new left-right populist government has failed to take adequate steps to correct the deficit since it took power last October.

The government deficit spiked to 4.9% of GDP in 2023 as energy-support measures were implemented amid the energy crisis. The EC projected the public deficit to increase to 5.9% of GDP this year and to decrease a bit next year to 5.4% as the energy aid is expected to wind down.

The European Commission also recommended that Belgium, France, Italy, and Malta enter the EDP.

The EDP had been suspended during the COVID-19 pandemic, but this suspension was lifted at the end of last year. 

The Commission recommendation is due to be endorsed by the European Council in mid-July, and then the countries under the procedure will have to set out how they plan to reduce the deficits by September 20.

If countries do not comply with the agreed path of correction, they could be liable for half-yearly fines amounting to 0.05% of GDP until they are compliant – although, as ING Bank points out, this famously has not happened so far.





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