What the European Semester does and does not do

Fiscal rules 

Most people have heard of the EU’s debt and deficit limits. They tend to resurface during moments of crisis. They became widely known during the euro area crisis, featured prominently in the austerity debates that followed, and returned to the headlines when they were suspended during the pandemic. Under these rules, governments are expected to keep annual deficits below 3 per cent of GDP and public debt below 60 per cent of GDP. They are a blunt instrument, designed to enforce fiscal discipline, treating routine public spending and long-term public investment in the same way.

When growth is strong and government revenues are rising, countries can meet these fiscal limits even as risks grow beneath the surface. In downturns, the same rules force governments to cut back precisely when investment is most needed. 

Lessons from the euro area crisis

The financial and euro area crises exposed these limitations clearly.  During the euro area crisis, the rigid application of the rules contributed to abrupt cuts and serious economic damage in several countries. The recipe of strict fiscal rules and punitive adjustments was clearly insufficient. 

In many cases, sharp spending cuts led to mass unemployment, which in turn deepened the downturn and reinforced the crisis. 

The European Semester as an early warning system

Enter the European Semester. Launched in 2010, as the euro area crisis was already unfolding, it was designed to coordinate national budgets and economic policies before spending decisions were finalised. Each year, Member States submit their budget plans and reform strategies for review. The European Commission analyses these plans, assesses risks, and issues recommendations, which are then discussed and endorsed by the Council.

The limits set by the Stability and Growth Pact remain the anchor. The European Semester is an ongoing process that brings countries towards them, using surveillance, analysis and guidance rather than relying solely on ex post enforcement.

Concretely, the preventive arm is where the European Semester tries to spot problems before they turn into fiscal trouble. The Commission looks for warning signs in national budget plans and longer-term spending paths that could undermine economic or budgetary stability. When it sees risks building up, it issues recommendations so governments can adjust early, rather than being forced into abrupt corrections later.

What counts as fiscal risk

What matters is how these risks are understood. The preventive arm does not focus only on whether a country meets the debt and deficit limits today. It also flags pressures that could weaken public finances tomorrow. For example, persistent labour shortages or weak productivity are treated as risks because they slow growth, reduce tax revenues and make it harder for governments to sustain their budgets over time.

This can be seen clearly in the most recent European Semester cycle. In the 2026 Autumn Package, the Commission repeatedly discusses pressures linked to labour markets, energy prices and defence spending. Housing affordability and supply constraints are identified in several of the reports that the Commission issues to each country. Energy costs are analysed as a source of inflation and pressure on public budgets 

Recently, defence has become a central feature of the European Semester. 

In the 2026 cycle, defence spending is discussed repeatedly in country reports and recommendations. Public expenditure related to defence is treated explicitly as a budget issue, with attention paid to its scale, its growth and the restrictions it puts on national fiscal capacity.

This reflects a broader political shift. Defence is now recognised at the EU level as a strategic objective, and the European Semester has adapted accordingly. The preventive arm does not question whether defence spending is legitimate. Instead, it focuses on how higher defence spending can be accommodated in a way that remains consistent with fiscal discipline and long-term budget sustainability. In other words, defence has been translated from a political priority into a concrete budgetary concern within the Semester.

Climate at the margins

Climate change, by contrast, is largely pushed to the fringes. Where climate appears, it is often folded into broad references to employment, growth or social concerns, rather than treated as a driver of future public spending in its own right. In documents linked to fiscal, budgetary and macroeconomic surveillance, climate is only mentioned a limited number of times.

This is difficult to reconcile with the EU’s own political framing. Alongside defence and digitalisation, the green transition is consistently presented as a core part of Europe’s economic transformation. It is expected to shape investment needs, growth patterns and public spending for decades to come. Yet, unlike defence, this strategic objective has not been translated into a systematic consideration with dedicated fiscal surveillance.

This matters because climate change is not an abstract or distant risk. It is one of the largest predictable sources of future public spending. Floods, heatwaves, droughts and energy shocks already require substantial public resources for emergency response, infrastructure repair and social support. These costs are rising, recurring and well-documented. Delaying investment in prevention and adaptation does not avoid them. It makes them larger, more frequent and harder to manage over time. A clear risk to future fiscal sustainability. 

Climate change is an obvious candidate for integration into the preventive arm of the European Semester. The Semester was introduced to anticipate future budgetary challenges. If the Semester claims to prevent these fiscal problems, it must look seriously at the biggest predictable source of future public costs, just as it now does for defence.

That is why Finance Watch is advocating for climate risks, and climate-related spending needs to be integrated into the preventive arm of the European Semester. This does not require new rules or new institutions. It means using the existing framework more coherently, so that the EU’s main tool for preventing fiscal problems addresses the problems at hand.

• To explore this proposal in more detail, read Finance Watch’s Aligning climate & socio-economic governance within the European Semester.
• If you would like to support this work, you can become a Finance Watch member, take part in working groups and contribute to publications on public finance.

Max Kretschmer, Finance Watch