The Stability and Growth Pact, which was suspended for three years after the pandemic, will be officially reinstated in 2024. But it may have a new look: after months of deliberation, the European Commission has presented its proposal to reform the rules governing public spending. Member States. Rules that have been accused for years, especially by Italy, of being a longitudinal loop that hinders growth and employment. But for supposedly frugal countries from Germany to the Netherlands, these rules are seen as a guarantee of account stability, especially in countries with high public debt and seen as “cicadas” when things go wrong. They are knocking on the doors of ‘ants’ to ask taxpayers for money. Whatever the positions in the EU, the reality is that with the crises that erupted before Covid, most economists decided that the Pact did not work as designed. And Brussels is trying to change that. However, with a proposal that may not resolve divisions within the block.
current rules
The current version of the Stability Pact requires Member States to maintain annual deficit expenditures (higher than tax revenues) at 3% of gross domestic product (GDP) and public debt at 60% of GDP. The biggest criticism of the Pact was above all about the second parameter: Countries that exceed the 60% threshold must commit to a debt reduction process that envisages a 5% annual cut. This path was considered unrealistic for countries with public debt more than twice the benchmark (134%), such as Italy. Unless you want to get your hands on a long season of public spending cuts, tears and blood reforms like those that brought Greece to the brink of bankruptcy.
The Covid-19 pandemic, which has increased the debts of the entire EU, has made the limit of this rule even more evident. But changing the two parameters of the deficit and public debt would have required the Treaties to be amended, i.e. opening Pandora’s box of political divisions between Member States, the possibility of not reaching an agreement in a tangible way. Given the new challenges Europe is facing (post-pandemic recovery, ecological and digital transition, geopolitical rebalancing, tensions between China and the US to name just a few), it is imperative for everyone to have a more timely agreement. Therefore, the green light was given for the reform, on which work began before Covid-19.
Innovation
Negotiations have been going on for years and now we have come to the final rounds. Today’s proposal of the EU Commission sought to synthesize the positions of various governments. As we said, two parameters such as deficit and debt remain untouched, but Brussels proposes to change the way government expenditures are calculated and the way to reach these parameters. The password is credibility: Among the failures of the current version of the Pact is that it has actually turned into a complex tool (calculations of annual deficits have wide political discretion) and that it has not been implemented in practice in practice. For example, despite repeated violations of the rules, no country has ever been charged the ‘fine’ stipulated in these cases, i.e. a fine equal to 0.1% of GDP. The real sanction (not written in the rules) was to unleash violent political conflicts between Brussels and some capitals like Rome, which had negative implications for the states involved in terms of market stability (think spillover).
A country specific plan
The Commission wants to tackle all these critical issues by giving countries more time to reduce their public debt, while also creating simpler rules to follow to achieve this goal. First of all, for the calculation of the deficit, the net primary expenditures will be taken as a reference, ie how much each State spends net from what it pays for the debt interest (in 2021 these interests are about 200 thousand TL in Italian accounts) 60 billion, just to have an idea ). On the other hand, the so-called ‘golden rules’ have disappeared, meaning that expenses for emergencies (such as immigration or earthquakes) will no longer be deducted from the calculation.
Second important point: Brussels will negotiate a “single medium-term plan” for each member state, adapted to the country’s characteristics, which envisages “wider room for maneuver in determining their own budgetary adjustment paths”, as well as “reform commitments”. and investment that must be respected once received”. For each Member State with a public deficit of over 3% of GDP or a public debt of over 60% of GDP (in our case), the Commission will publish a specific ‘technical trend’. Each country will have four years to implement the harmonization process: in short, there is no competition every year as Italy demands, but in making this journey, the country will have to comply with a number of technical parameters (voiced by the thrifty) to prevent the extra time given to be turned into a way of avoiding commitments. a concern).
Node of technical parameters
It is precisely these parameters that risk sparking debate among EU governments and jeopardizing reform. Recently, Germany submitted a document demanding that countries with high public debt reduce their debt by at least 1% of GDP per year and that their annual expenditures always remain below 1% of GDP from their potential growth. Had these parameters been adopted in 2022, Italy would have to reduce public spending by 20 billion in just one year.
Therefore, the Commission sought a middle ground between the pressures of Berlin and Italy. Here’s how the plan works: whoever has high public debt commits to Brussels to reduce their debt within four years. It will do this by keeping the deficit to GDP ratio (hence annual spending) below 3%, or if it exceeds this ratio, it will reduce the public debt by 0.5% (not 1) of GDP per year. requested by Germany). So far, the Commission seems to have adopted the Italian demands. But there is a third parameter in the package: the over-indebted state will have an obligation to keep its annual expenditures below potential GDP growth. That’s what Berlin is proposing, just unlike the German document, here Brussels doesn’t specify how far this spending will lag behind potential growth.
Risks for Italy
However, this parameter could ‘punish’ Italy, even if it does not fulfill Germany’s demand to the letter. To give a practical example, we can take the year 2024, when the Stability Pact will come into force again, as a reference: Italy’s GDP will grow by only 1% next year, according to the latest forecasts from Brussels. This means that no more than 1% of GDP can be extended by the Meloni government’s purse strings. outside the 3% limit.
What happens next if they don’t follow the rules? “For member states facing significant public debt problems, deviations from the agreed path of fiscal adjustment will automatically lead to the opening of the excessive deficit procedure,” warns Brussels. “Failure to meet the reform and investment commitments that justify the extension of the fiscal adjustment period may result in a shorter adjustment period,” the Commission adds. On the other hand, in case of external factors such as an epidemic or war, as in Ukraine, Brussels may give countries more time.
Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
