Last February 10, the Council of the EU and the European Parliament reached a provisional agreement on reform of the Stability and Growth Pact. A measure that was already under discussion before the pandemic crisis, which has undergone a strong acceleration in recent times. The Brussels leaders, but also the member states, have in fact realized that, despite the past revisions of the EU economic governance framework, the rules and their application have manifested themselves over time growing critical issues concerning numerous variables, from rules that are the same for everyone to constraints that are difficult to respect.
“The need for reform of the Pact became more stringent when, to deal with the crisis generated by the pandemic in 2020, the rules were temporarily suspended for a duration subsequently extended to the end of 2023 due to the energy crisis caused by the war in Ukraine,” he explains Assonymous in its Notes and Studies concerning the Stability and Growth Pact. “The return to the old rules would be problematic today due to significant changes that followed the crisis: mainly the generalized increase in public debt and interest rates in many countries and the need to support significant investments in many strategic sectors,” he continues the association.
From these considerations a reform was born which aims to overcome the previous limits and ensure greater compatibility between national routes of debt reduction and financial recovery and the need to ensure adequate public financing to support the energy and digital transitions.
“Overall, the agreement reached on the reform of the Stability and Growth Pact does not differ significantly from the proposal that the European Commission presented in April 2023 but, at the request of some countries, in particular Germany, introduces into new system of annual quantitative constraints (safeguards) for the reduction of debt and the public deficit", comments Assonime which in its report traces the main aspects of the reform, in particular the innovations introduced in the regulations that define the preventive and corrective part.
The reform of the Stability and Growth Pact: the preventive arm
The reform of the Stability and Growth Pact does not change the two cornerstones, i.e. the 3% reference values for the deficit/GDP ratio and 60% for debt/GDP ratio provided for by the Treaty on the Functioning of the EU.
What is changing instead is the so-called "preventive arm", with the transition from a system of rules and objectives that are in principle the same for everyone to a system that will be based on Negotiated debt reduction pathways between the Commission and the individual member state on the basis of shared objectives. “The emphasis therefore shifts from the monitoring of public deficits year by year to the evaluation over a multi-year horizon, comments Assonime who, among the main innovations, also cites the abolition of the criterion of convergence of the structural balance towards the medium-term objective ( Omt) and, in the corrective arm, of the rule of annual reduction of one twentieth of the difference between the debt/GDP ratio and the 60% objective, considered too stringent.
It will work more or less like this: within the preventive arm procedure, there will be a first policy phase in which the Commission will have to define, for member states with a public debt greater than 60% of GDP or a deficit greater than 3% of GDP ,”reference trajectories” for the net expenditure lasting 4 years, extendable to seven. At the request of Germany, in the Ecofin agreement, the "preventive arm" of the rules were added two additional constraints on debt and deficit: The first safeguard concerns all countries with a debt-to-GDP ratio above 90% which, during the adjustment period, are required to reduce this ratio by at least one percentage point of GDP per year on average. The second safeguard requires all member states with a debt-to-GDP ratio above 60% or a deficit above 3% of GDP to improve the structural primary deficit "during periods of growth" by 0,4% per year. over a 4-year adjustment period or 0,25% over a 7-year period, until reaching a structural deficit of 1,5% of GDP to leave sufficient margins to accommodate any financial shocks without exceeding the threshold of 3 % of Maastricht.
These mechanisms apply only to member states that are not the subject of one excessive deficit procedure, while the latter remains substantially unchanged.
The reform of the Stability and Growth Pact: the corrective arm
The corrective arm has instead undergone minor changes. Among those approved, the changes to the la stand out excessive deficit procedure based on the deficit criterion which is activated if the deficit exceeds 3% of GDP, unless it is an exceptional, temporary and modest event. Otherwise, the excessive deficit procedure (EDP) based on the debt criterion is strengthened and focused on deviations from the agreed path of net primary expenditure. Among the "relevant factors" for the Commission's assessment of the existence of an excessive deficit are, in addition to the level of public debt problems and the extent of the deviation, the investments in defense and progress in implementing investments and reforms undertaken under Next Generation Eu.
Finally, it should be underlined that, to prevent budget corrections from being very restrictive right from the start, under strong pressure from France (and Italy), it was granted that for countries that will enter into infringement proceedings for excess deficit, the European Commission will evaluate and take into account the impact ofincrease in interest rates in defining the adjustment path.
Assonime's opinion
"All in all the new rules make the constraints more flexible annual changes on budgetary policy, with less stringent parameters to be respected in terms of adjustments required compared to previous rules. Despite this flexibility, the new pact still requires a restrictive fiscal policy in almost all member states at the same time, with possible negative repercussions for the growth of the entire area in a phase in which the challenges of the double transition and global ones are very significant. Furthermore, the new rules seem to subject high-debt countries to significant control by the European Commission not only over budget policies, but over the entire framework of economic policies", underlines Assonime who then goes on to evaluate the impact of the new rules on Italy.
“With respect to the rule according to which high-debt countries are required to reduce the debt/GDP ratio by 1%, it should be clarified that this rule applies on average over periods of 4-7 years and not in each year in a manner punctual. This grants a certain margin of flexibility which, combined with the new monitoring parameter, consisting of the net expenditure that allows the full functioning of the automatic stabilizers, should allow the implementation of anti-cyclical policies in the recession phase", underlines the Association.
“As for the other quantitative safeguard criterion on the deficit (the achievement of the safety margin of 1,5% of GDP), it must first of all be specified that this will only apply in the "preventive arm", outside or once exiting the deficit procedure excessive", he continues, specifying that "the new European rules, therefore, should not in themselves lead, at least in the short term, to the need for a corrective action".
Assonime's comment ends with the hope that, once the construction site of the European governance architecture is closed, "the agenda of the new Commission will quickly focus on how to improve the functioning and competitiveness of the EU economies, starting from the completion of the banking union, from the creation of a European capital market, capable of contributing to the financing of large European investments necessary for the double green and digital transition, common defense, European industrial policy"
