At the end of April, the European Commission presented its proposal to the Council for a new European governance firmly planted in the new economic, financial and geopolitical context. The proposal on the new Stability Pact aims at debt sustainability without jeopardizing the investments necessary for energy autonomy, strategic autonomy in the digital world and the strengthening of the common defense capability.
Ma not all knots have been resolved for adoption by the Council, despite the lengthy process of consultations to change the rules introduced after the financial crisis that weighed down the European recovery and increased public debts, against the good intentions of the proposers.
Stability Pact: the strengths of the new EU Commission proposal
Let's see what are the strengths of the proposal on the Stability Pact, which are also the most promising for Italy, and which are the sources of disagreement, so unfounded that they have not found agreement even in the country that proposes them, Germany, where the economy and finance ministries had published two different papers on the subject.
The first strong point is that the new economic governance is consistent with other European measures: Next Generation EU (PNRR), REpowerEU and other industrial policy initiatives. Debt sustainability takes the central place it deserves together with the growth to which sustainability is linked. The path to debt relief is based on a national plan that includes reforms and investments and a dialogue between the country and the Commission. For investors who buy the debt of European states, this process is an important guarantee and the wolves will not surround the isolated country.
In fact, the success probability of a lasting reduction debt rises to 75% when accompanied by domestic and external expansion, structural reforms and productive investment, and spending reviews rather than increased revenues, according to the IMF's analysis of public debt reduction cases in its latest report (WEO April 2023.
Il investment quality control it is necessary for debt sustainability and the new fiscal governance provides that only investments in common European priorities can prolong the period scheduled for debt reduction. And the goal achievement rule applies. Also, they come introduced much more effective sanctions of the past for countries that do not implement the agreed reforms and investments.
Since only investments that increase productivity, i.e. long-term growth, increase debt sustainability, there is no reason to ask for a golden rule (for the Messina bridge?) which is automatically realized with investments that have returns higher than the financing costs.
Germany got that countries with deficit greater than 3% of GDP reduce it by a minimum of 0,5% of GDP per year. For the debt, it remains that it must be reduced at the end of the scheduled period, but without specifying the amount. The tool to prevent excessive fiscal imbalances is net primary expenditure which is under the direct control of Parliament. It also serves to reallocate public resources where they are most needed, it is anti-cyclical and it works when it doesn't hurti.e. when the economy grows. The program agreed with the Commission for 4 years may be renegotiated by any new governments.
Stability Pact: Italian growth and the German crisis
Thanks to NGEU together with the suspension of the old European fiscal rules, we had the GDP rebound in 2021 and the decrease in the euro area's average debt from 97% of GDP in 2020 to the expected 90% in 2023. E Italian debt decreased by almost 15 percentage points during the same period! It also allowed us to quickly respond to Putin's energy blackmail and dodge the expected recession for the monetary response to inflation.
They just came out data for the first quarter of 2023: Italy grows by 0,5% and Germany by 0,0%. While in the past Germany could ignore the lack of demand in Europe by exporting to China, this has now become a high-risk strategy.
Geopolitics has changed the cards on the table: today foreign demand is unstable, so the growth of investments and consumption in the domestic market also becomes important for the profits of German manufacturing. In the most recent regional forecasts for Europe, the IMF calculates that the expected reduction in GDP in European countries will be greater the greater the dependence on Russian imports of fossil fuels. So Italy and Germany the most affected (-1,5%) in future growth. All components of Europe's strategic autonomy - investments in the energy transition, digital diffusion which is linked to the former, the restructuring of value chains - are now an existential goal.
The political coherence of the new Stability Pact
A second strong point is the policy coherence, or the ability to maintain the support of citizens which, according to Monnet, is a guarantee of success for every step forward by the Union.
The commission broadens the horizons of medium-term budgetary policy and takes charge of outlining a European tax stance (ie the impact of fiscal policies on aggregate demand and growth in the area) which must be expansive when there is a risk of recession, then coordinating national policies. In the past, however, the impact always ended up being recessionary, as the sum of the country-specific recommendations. The old rules were pro-cyclical, the opposite of what is necessary for stability.
The new economic governance is based on an analysis of debt sustainability for each country. Based on this analysis, the country draws its own debt adjustment and reduction strategy which it discusses and agrees with the Commission. This analysis considers multiple present and expected factors of the national economy and the international context. Quite different from the ex-ante fixed percentage equal for Italy with its debt of 145% of GDP and for Estonia with its 21%. This kind of analysis (DSA) it has been used by the IMF for the past 20 years to assess a country's resilience, and financial markets are routinely satisfied with it. It is not immune to error when financial conditions become volatile and global trade changes dramatically, such as after the 2008-9 financial crisis.
The use of the DSA for each country together with the condition that the debt decreases at the end of the planned period without numerical targets currently represent points of disagreement: The German finance ministry, which kept its counter-proposal secret almost until the Council meeting, calls for a return to fixed quantitative rules for an annual debt reduction. It is a centralizing position not suited to a liberal party. More serious is that it underestimates the likelihood of any unforeseen event that reduces the expected percentage, generating a chain reaction on the part of investors: this is capable of endangering debt sustainability in the entire area.
In conclusion, the Commission's proposal for a new economic governance good for Italy to resume the path of convergence with the richest countries after a quarter of a century of near-stagnation. It's great for Europe to achieve the objectives of public debt reduction, strategic autonomy for industrial development, and energy autonomy to free oneself from the conditioning of any type of fossil fuel producing autocrat. And if German liberals stand by their core values and global best practices, they too will agree to adopt the Commission's proposal.
