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 still the pole stars, the maximum ceilings given to the Twenty-Seven. 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. Brussels will then check every year whether the set path is being followed and request (or accept) adjustments if necessary.

Password: reduce debt and deficit

The text calls for an average annual reduction of 1 percentage point in the debt/GDP ratio for countries with debt above 90%. Among them is Italy, which is in debt. monsters With 134% of GDP, it ranks second in Europe behind Greece, which has 162%. For the most virtuous countries (such as Germany), with debt between 60 percent and 90 percent, half the annual adjustment requested for Italy, that is, 0.5 percent, will be requested. Deficits will also need to be reduced at a constant rate, and even states that ‘spend’ less, i.e. those that do not exceed the inevitable threshold of 3%, will need to reduce the deficit. To do this, they will need to create a ‘buffer’ to prevent the budget deficit from exceeding the proverbial 3% in the event of a crisis. 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%), we are now asked to create a “room for manoeuvre” of 1.5% as a medium-term target, so we will have to do this. Moving towards a 1.5% deficit relative to Gross Domestic Product (previously we were asked to target 0.5%) to support (somewhat) investment. The annual adjustment required to ensure that the buffer threshold is reached should be equal to 0.4% of GDP (in four-year recovery plans); this could be reduced to 0.25% of GDP (in seven-year recovery plans). If we are determined to invest and reform.

For Italy, for other countries that will find themselves under the excessive deficit procedure (those that exceed 3% and have to necessarily reduce by 0.5% per year), this means that they exit the procedure and fall below this rate. Given the 3% budget deficit/GDP limit (which remains the compass), the path to further reductions in spending will be slower, more gradual. But it will still be there. And this will happen if Italy does not openly embark on another, more significant reduction path, such as debt reduction, and thus has to comply with different rules.

‘transition clause’

To soften this effort, at least in the short term, at the urging of France and with the support of Rome, a transitional article covering the period from 2025 to 2027 was approved in calculating the budget deficit. The increase in debt interest due to the ECB’s maneuvers that brought interest rates to record levels. In short, considering that states will have to pay higher interest to pay their debts, these interests will be taken into account and more tolerance will be shown. It’s not quite a spinoff, but it’s close. However, starting from 2028, this tolerance will disappear.

(Fake) ‘golden rule’

Investments made for defensive purposes will also be taken into account when evaluating the opening of a possible procedure regarding excessive deficit. This is not exactly the ‘golden rule’ that Italy demands, but a watered-down version of it. The ‘golden rule’ means that some investments are not taken into account at all in the rate calculation. For example, if a State spent a total of 100 billion per year and 20 billion on Defense, the calculation of the GDP deficit ratio would be based on the figure of 80 billion in total expenditure (these are illustrative figures). However, in the new Pact, defense expenditures are thought to reduce possible excesses, but they are not kept completely separate. For example, if you were to reduce your debt by 2% over four years, you would do so by reducing it by 0.5% each year. However, if it is exceeded due to defense expenditures in the first two years, the Commission will turn a blind eye to this, but the lost part will have to be compensated by reducing the deficit in the second two years.

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, in order to reduce GDP, the budget deficit must be reduced, which is the austerity axiom that thrifts and hawks 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 deficit means, in many cases, reducing public investments, which are essential to support a country’s economic growth and therefore the growth of its GDP. In short, the ratio of deficit to GDP is reduced not only by reducing the deficit but also by increasing GDP. It even gives a deficit.

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