Last week some clarifications arrived from Brussels regarding the application of the flexibility clauses contained in the Stability and Growth Pact. The aim is to encourage investment and structural reforms by making the "best possible use" of the flexibility already existing in the Treaties. To many, the publication of these guidelines seemed a step forward towards a relaxation of the rigor "imposed by Europe", a breakthrough strongly desired by Italy, and endorsed by the Junker Commission. Certainly, the new guidelines will help make European decisions more transparent and, above all, more predictable. But are we really sure that the final effect for the member countries will be that of having obtained greater margins of flexibility? Maybe not entirely and let's see why.
The European executive communication aims to clarify the interpretation, and therefore the application, of the flexibility clauses, namely that of structural reforms, that of investments and that relating to the effects of the economic cycle
As far as reforms are concerned, the Commission specifies that the country which respects the 3 per cent limit (i.e. which is in the preventive arm of the Pact) - which is the case of Italy - may be allowed to temporarily deviate from the objective of medium term of a balanced budget (or from the path towards it), if it adopts reforms with verifiable and positive long-term impacts, both on the budget and on potential growth. The deviation cannot exceed 0,5 percent of GDP and must be corrected within four years. In case the reforms have not yet been implemented, they can only be considered if well defined, with credible deadlines for their adoption and implementation. For Italy, the impact of the reforms, in particular the Jobs Act, will be examined in March, and if the outcome is positive (as is likely) this will give rise to margins of flexibility.
As regards the investment clause, also in this case, it is possible to deviate - always temporarily - from the medium-term objective and its convergence path, but under very specific conditions. Firstly, the 3% limit must be respected. Secondly, only investments intended to co-finance European projects included in the framework of structural and cohesion policy (including projects co-financed under the Youth Employment Initiative), trans-European networks and the Junker Plan Fund. These investments must have positive, direct, and verifiable effects on long-term growth and the sustainability of public finances. Finally, the clause can only be activated if GDP growth is negative or if GDP remains well below its potential (with a consequent gap between actual and potential output exceeding minus 1,5% of GDP). In the case of Italy, which in 2015 is expected to record positive gross domestic product growth (0,6 per cent according to government estimates) and a negative output gap (-3,5 per cent), this clause could be applied to the spending aimed at co-financing European projects: undersecretary Delrio would have quantified it at around 4 billion euros.
However, it should be noted that deviating from the medium-term objective does not mean that these investments can be separated from the deficit. Basically “none Golden Rule” the Commission specified. After all, the Germans (but not only them) would have opposed it: experience shows that such a rule puts the public budget at risk. In Germany, for example, the Golden Rule it was introduced in the Constitution (article 115) in 1969: the public debt in just under thirty years increased from 20 to 63 per cent of GDP. In 2009, the government of Grosse Coalition of Chancellor Merkel therefore decided to eliminate her.
As regards the effect of the economic cycle, the Commission has clarified that "it will use a matrix that specifies the appropriate fiscal adjustment to require from countries". From now on, to find out the extent of the correction that each member country will have to make to its structural deficit, it will be sufficient to consult this new matrix published on page 20 of the Communication. For example, in 2015, Italy having an output gap of -3,5 per cent and therefore between -4 and -3, is placed in the box "Very Bad Times” and therefore will have to make a correction of 0,25 per cent, and not the 0,5 per cent as previously requested. Good news then.
Things, however, already starting from 2016 change. The Italian output gap is estimated at -2,6 per cent, with a GDP growing more than potential. Based on the matrix, Italy will be in the box “bad times”, (output gap between -3 and -1,5), which projects a correction of 0,5 percent. In essence, although the Italian output gap is very close to the previous range, i.e. that of "Very bad times” (output gap between -4 and -3), there will be no chance to trade a lower correction. You have to stick to what the matrix says! The same is true for 2017. With an estimated output gap of -1,4, Italy falls into the box “Normal times”, (output gap between -1,5 and +1,5), which requires a correction of more than 0,5 percent. With an output gap worse by only one tenth of a percentage point, Italy would have returned to the previous box and the correction would have been only 0,5 percent. An objective that, perhaps, would have been achievable through political negotiation if the matrix had not been there. After all, who could argue that an output gap, for example equal to -1,55 per cent is very different from the one estimated for Italy in 2017 equal to -1,4 per cent?
These examples, which are somewhat technical, show that, if until now there was room for negotiation with the Commission, it is now much more complicated. From now on, what the table provides will prevail, and the existing spaces of discretion are considerably reduced. Suffice it to say that for 2015, Italy had practically already obtained the green light for a correction of 0,3 per cent, despite the initial effort envisaged by the Commission being 0,5 per cent. In practice, it would seem that to the request for "greater flexibility", the Commission has responded rather by granting "greater clarity" and "greater transparency". And this has in fact led to the attribution of more power to the so-called bureaucracy (through the use of the matrix) and, consequently, less margins for politics. Perhaps the opposite of what was intended.
