In the discussion in Italy about the extension of the current 'Stability and Growth Pact' (Psc) or switch to the adoption of new tax rules within the year, there is something "unsaid".
In theory, it would also be possible to extend the PSC suspension clause launched in March 2024 to help the countries affected by the pandemic emergency and expiring at the end of the year for 2020: but the consequences of not adopting the new fiscal rules would be deleterious for Italy which would risk falling from the frying pan into the fire for at least three reasons: political, institutional and economic.
It is the analysis of economists Marco Buti and Marcello Messori on the Sole24ore.
The obstacle course of the new tax rules
The goal of approving the new fiscal rules by the end of 2023 is, according to the two economists, "realistic and necessary". The definition of these tax rules (submitted by EU Commission last April) before the European elections of June 2024 is essential to ensure that their operations start from the beginning of 2025 and to define transitional agreements complying with them for 2024. There are difficulties to arrive at this result: first of all the regulatory framework proposed by the Commission will have to be endorsed by European Council and voted by the EU Council. But the biggest stumbling block could be the launch of one of its essential components, namely the regulation that establishes the rules for the reduction of high public debts, which will then have to be adopted by a decision of the whole European Parliament.
Postponing the adoption of the new fiscal rules could turn out to be a boomerang
And here is the heart of the matter highlighted by the two economists: in theory it would not be dramatic to postpone the approval of the new rules until after the European elections, with the hope of obtaining a result closer to the preferences of the national governments. In the case of Italy, it would mean deducting some investment costs from the public deficit, say Buti and Messori. But “we think it's a rash calculation. The Italian Government itself claims, rightly, that such a reactivation would negative effects for the management of public budgets. We add that, regardless of its feasibility, even the simple extension of the suspension of the PSC would have deleterious impacts for at least three reasons” and economists identify three strands: economic, institutional and political.
The economic profile: at the mercy of international financial investors
From an economic point of view, the sustainability assessment of the imbalances in the public budgets of the most fragile EU countries such as Italy "would no longer be based on the implicit safety net guaranteed by the EU" economists underline, "but it would be dominated from the choices of international financial investors".
Furthermore, without shared fiscal rules (as the president of the ECB Christine Lagarde has often maintained) the assets of the EU would be more fragile in case of exogenous shocks or financial strain. As a result, the European parachute would fail and the pressure of the financial markets would oblige il Italian government to adopt national tax policies more stringent compared to those practicable in the presence of new tax rules. Therefore, in a country like Italy, any extension of the suspension clause of the Stability and Growth Pact "would lead evil rather than good".
After the European elections of 2024, there is in fact the risk that the various national governments will agree to restore the old Pact or to enact new fiscal rules very similar to the old ones.
Italy, already marked by the difficulties of implementing its own Pnrr, of proceeding with tiring budgetary adjustments and of placing itself on sustainable growth paths, "would risk being the sacrificial victim of such an agreement".
The political profile: possible greater pressure from more rigorous governments
Under the profile politician, there is a high probability that the elections of next June will strengthen the blockade of fiscally stringent governments which will therefore have further room for pressure on the new Commission to impose tighter central tax constraints compared to the national adjustment paths envisaged by the new rules.
The institutional profile: risk of being subject to more drastic fiscal rules
From an institutional point of view, the weakening of the propensity for solidarity between EU countries,
it has hardened the position of those Member States which criticize the new tax rules, proposed by the Commission, as not stringent enough. Trying to prolong the suspension of the old PSC runs the risk of providing new arguments in favor of that position. The paradoxical consequence would be to pay for this further suspension with an increased risk of undergoing a stable restoration of tax rules similar to the existing ones if not more drastic.
