Stability Pact: rules are changing but austerity continues

Ministers of the 27 member states of the European Union have reached a very difficult agreement on the bloc’s new budget rules. Reform of the Stability and Growth Pact has been called for for some time, with countries such as Italy pushing for it to mean abandoning austerity once and for all. But the resistance of the so-called frugal nations dashed this hope, and the new Pact marks no break with the past, only more flexible (and also more complex) rules.

The roofs remained the same

The basis of everything always remains the same; Maximum thresholds of 3% for the ratio between budget deficit and GDP and 60% for public debt, approved by the Maastricht Treaty. These are the maximum limits given to Twenty-Sevens. States that do not comply with these parameters will have to comply with repayment plans agreed with the European Commission that will last four to seven years. Building on the experience of the National Recovery and Resilience Plans (the now famous Pnrr), governments will no longer need to present annual plans, but four-year fiscal plans; These plans will also offer the opportunity to extend the fiscal adjustment period for up to seven years. implementation of investments and strategic reforms.

reduce your debt

The text calls for an average annual reduction of 1 percentage point in the debt/GDP ratio for countries with debt above 90%. These include Italy, whose debt is 134% of GDP, second in Europe behind Greece at 162%. For the most virtuous countries with debt between 60% and 90%, an annual adjustment of half, or 0.5%, will be requested. Even states with the best accounts, that is, those that do not exceed the critical threshold of 3%, will need to reduce their debt, and to do this they will need to create a ‘buffer’ to avoid the deficit. In a crisis, they exceed the proverbial 3%. This means they must continue to reduce the deficit further and further. But unlike before, if the target remains budget (i.e. expenses and revenues are equal, 0%), as a medium-term target we are now asked to create this 1.5% “maneuver room”, so we can achieve it. maintaining a 1.5 percent deficit to support investment (previously we were required to target 0.5 percent). To guarantee the buffer, the required annual adjustment must be equal to 0.4% of GDP (in four-year recovery plans), which can be reduced to 0.25% of GDP (in seven-year recovery plans).

‘Transitional clause’ and (mini) ‘golden rule’

Turning to debt reduction, at the urging of France and with the support of Rome, a transitional article for the period 2025-2027 was approved, which stipulates that the increase in debt interest will be taken into account in calculating the deficit cut. With the maneuvers of the ECB, maneuvers that brought interest rates to record levels. It’s not quite a spinoff, but it’s close. When evaluating the opening of a possible procedure for excessive deficit, investments in green policies as well as investments in defense will be taken into account. This is not exactly the ‘golden rule’ that Italy demands, but a watered-down version. The golden rule means that some investments are not included in the calculation at all. For example, if a state spends 100 per year on defense and 20 on defense, the deficit to GDP ratio will be 80 (these are descriptive figures). However, in the new agreement, it is thought that defense expenditures will reduce possible excesses, but they are not completely separated.

The austerity paradigm continues

Beyond complex numbers and figures, the basis of the new Pact remains the assumption of the old one; In other words, to reduce GDP, the budget deficit must be reduced, which is the austerity axiom that thrifty people always want. However, during the years when austerity policies were implemented, this axiom was questioned and criticized by those who argued that gradually reducing the budget deficit would not necessarily lead to a decrease in debt, on the contrary, it could increase it. This is because reducing the budget deficit means suppressing public investment, which in many cases is essential to supporting a country’s economic growth.

Continue reading at Europa.Today.it

Source: Today IT

\