The new Stability Pact now appears to have taken its final form. Germany, France, Italy and Spain have agreed on new rules and it appears that only the final details are missing to end the game and the last resistance of some frugal countries has been overcome. It is aimed to give the definitive green light within the year for the return of financial restrictions suspended after the pandemic and frozen by the war in Ukraine in 2024, with a clearer and more realistic regulatory framework. We have once again put Europe in a deadlock.
Borders of the Old Pact
In fact, the old Pact had been no longer convincing the vast majority of economists for some time. Even European Commission experts, long seen as dark advocates of austerity, have acknowledged its failure: it has not only helped but also blocked the most indebted countries, such as Italy, from reducing their public debt burden. overall economic growth of the continent. Moreover, due to the way it was structured, the Pact was only able to translate Brussels’ recommendations into concrete actions in a few cases and was mostly ignored.
For example, despite repeated breaches of the rules, no country was sanctioned with the ‘fine’ expected in these cases, i.e. a fine equal to 0.1% of GDP. Rather, the real sanction (not written in the rules) was the emergence of violent political conflicts between Brussels and some capitals such as Rome, which would have negative effects (think spillover) in terms of market stability for the states involved.
The new Pact should fill these gaps by offering governments more sustainable and realistic ways to reduce public debt and budget deficits, leaving them the right margin of maneuver to pursue investment, especially given the need to pursue the ecological and digital dual transition. Not to fall behind the USA and China. At least in facilities, more flexible rules will be accompanied by more concrete sanctions in case of deviation from commitments. So whoever strays from the path will pay the price this time. But let’s see in detail what has changed.
Parameters
The current version of the Stability Pact provides for a ratio between member states’ annual deficit spending (i.e. higher than tax revenues) and gross domestic product (GDP) equal to 3%, and a ratio between public debt and GDP equal to 60%. It requires keeping the ratio. The biggest criticism of the Pact concerned, above all, the second parameter: countries that exceed the 60% threshold must commit to a debt reduction process that provides for a 5% cut per year. This path was considered unrealistic to achieve for countries with public debt more than twice the reference parameter, such as Italy. The increase in debt after the pandemic made this rule even more unrealistic.
In the new formulation, two parameters related to deficit and debt remain valid. However, the ways and times to achieve these are changing. The European Commission will be tasked with drawing up multi-annual plans with individual Member States, each of which will take into account the specifics of the respective country’s accounts. The duration of the plans will be 4 years and can be extended up to 7 years, for example, if the government commits to carrying out certain reforms and investments.
Multi-year plans
The plans aim to reduce both the debt and the deficit of those above the Pact parameters. Those with debt between 60 and 90 percent will need to reduce their debt by 0.5 percent per year. Those with over 90% debt, such as Italy, will have to reduce their debt by 1% per year (note that so far this rate has been 5%). However, the most complex issue for our country is annual expenses, that is, the budget deficit.
According to the agreement reached today, countries with debt over 60 percent will not only comply with the 3 percent deficit limit, but will also set aside during their plans a kind of piggy bank, a kind of protection “treasury” that will be broken in case of sudden crises. This rate starts at 1 percent of GDP for the least indebted and reaches 1.5 percent for states such as Italy. To fill this piggy bank, you will need to make an annual deduction of 0.3% if your plan is for 4 years and 0.2% if it is for 7 years. In both cases it is less than what current rules require (0.5%).
Flexibilities
Seen this way, everything seems like grain from the Italian mill. But behind the percentages there are a number of technical details that could make even these new repayment plans, albeit more diluted and less stringent, far from simple to implement. Triggering a tug-of-war with Brussels would this time bring real sanctions in addition to unintended effects on proliferation. The motto of our government was “flexibility” accompanied by parameters and limits. More precisely, Rome demanded that a number of expenditures on investments considered strategic by Europe itself, such as Pnrr and military investments, be excluded from the budget deficit calculation. But it is also necessary to take into account the impact of interest rates on accounts when the ECB raises interest rates to combat inflation across the Eurozone, as it did recently.
The request was accepted in part with the addition of a number of “flexibilities of interpretation”: the European Commission will be able to deduct defense expenditure, the national share of Pnrr and co-financing of projects supported by EU funds from the following calculation: deficit (for now only for the two-year period 2025-2026) and resulting from interest rate increases additional expenditure (for the period 2025-2027). Economy Minister Giancarlo Giorgetti insisted that these flexibilities were more structural (i.e. not linked to temporary factors such as increases in Pnrr or ECB interest rates). But there is progress compared to the clear “no” answer that Germany has voiced in recent weeks. Moreover, compared to the old Pact, this time the rules clearly state that countries can temporarily deviate from the path of reducing the budget deficit in case of epidemics or sudden wars that disrupt the economy. On the other hand, if public debt does not decrease sufficiently, flexibility will disappear.
Sanctions
To implement the agreed spending path, the Commission will be able to initiate disciplinary measures, which may result in sanctions, against the government that exceeds its expenditure by a certain amount in a given year or by a certain amount cumulatively over four years. or a period of seven years. The penalties will be every six months and equal to 0.05% of GDP (about €1 billion for Italy).
The new rules will now have to face final negotiations. This week there will be a summit of EU heads of state and government where they must make a decisive move in one direction or another. If an agreement is reached, the Economy and Finance ministers of the 27 countries will be ready to meet in an extraordinary manner before Christmas to sign the final agreement. The condition is not a requirement for the Pact itself, but for other games revolving around it. For example, it is now clear that the thrifters want Italy to finally ratify the ESM, the European stabilization mechanism that is disliked by a large part of the government, in exchange for concessions on the Pact. On the other hand, Minister Raffaele Fitto also included the issue of increasing the EU budget, one of the hottest files at the Brussels summit this week: The Commission asked for an additional $66 billion between now and 2027 to deal with the war in Ukraine, also on immigrants, our country Also for financial agreements such as the one with Tunisia, which are very valuable for
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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.
