In less than five months we will vote for the renewal of the European Parliament. This is an important test for the two main parties that are in government but also for those in opposition. The former, the Democratic Party and Angelino Alfano's new party, Nuovo Centro Destra, declare themselves pro-Europeans, even if they never miss an opportunity to repeat that "this Europe must be changed". The latter, however, Five Star Movement, Lega, Sel and Forza Italia, are preparing to conduct an electoral campaign with nationalist overtones.
On one point, however, there seems to be a substantial convergence of views: the Fiscal Compact - signed in 2012 by the Monti government - must be reviewed, if not actually abolished as proposed by Beppe Grillo. The new rules are seen as an obstacle to economic growth. Starting with the one on debt (article 4) which commits the 25 signatory countries (the United Kingdom and the Czech Republic have not joined) to reduce their debt by one twentieth for the part exceeding the threshold of 60 per cent of GDP. This would mean a cut of 45-50 billion a year for Italy, for a total of around 900 billion euros over the next twenty years.
If these are the figures, one would think that whoever signed the Fiscal Compact was in the throes of madness. In reality, this is not the case. And, in fact, a careful reading of the Treaty shows that the debt cut requested of Italy does not amount to 50 billion a year, but to a maximum of 7 billion, to be made one-off. Let's see why.
To assess compliance with the law, one must not only consider the reduction of one twentieth – on average for the previous three years – of the actual debt (the so-called backward looking criterion). The economic cycle can also be taken into account (cycle criterion) and/or the expected debt trend in the two years following the application of the rule (forward looking criterion). In essence, the debt rule requires compliance with at least one of the above three criteria.
Having clarified this point, let us come to the Italian case. Based on the forecasts contained in the Update Note of the Economic and Financial Document - published by the Ministry of the Economy and Finance last October - both the cycle criterion and the forward looking one are fully respected. Whoever is in government - or who was in the month of October - therefore has no reason to worry.
On the other hand, even those who don't believe in the macroeconomic picture prepared by Treasury technicians need not worry too much. Using the forecasts of the European Commission published last autumn (debt in 2015 equal to 133,1% of GDP and structural primary surplus equal to 4,6%), compliance with the debt rule based on the economic cycle criterion requires a initial cut of just under half a point of GDP, about 7 billion euros. A figure far lower than the 50 billion resulting from the application of the backward looking criterion.
The new tax rule is therefore much less stringent than usually presented in the political debate. Not only because – as we have seen – it is valued on the basis of three different debt configurations. But also because, in the event of a violation, the degree of severity of the sanctioning procedures is less than that envisaged by the rule on balanced budgets, which requires that the government deficit (net of the cycle) does not exceed 0,5% of the GDP Indeed, the Treaty establishes that, in deciding on the existence of excessive debt, the Commission and the Council take into consideration certain "significant factors", including potential growth, total factor productivity, economic trends, but also the level of the primary balance, the evolution of current and capital account expenditure and the financial contributions in support of international solidarity and the achievement of the Union's policy objectives. Furthermore, a qualified minority of votes within the Council can always block a Commission proposal to sanction a country for insufficient debt relief; in the event of an excess deficit, on the other hand, a qualified majority is required (principle of reverse majority, Article 7). Basically, in the current context, the most significant constraint imposed by the Fiscal Compact is that of a balanced budget, which, moreover, Italy has already almost achieved in 2014 (0,7 per cent, according to European Commission estimates).
On balance, an unjustified alarmism is being created about the size of the public debt cut, perhaps instrumental for those who don't really want to reduce public spending, not even by those 7 billion euros. Among other things, those who want the abolition of the Fiscal Compact have often also expressed themselves in favor of the mutualisation of public debt in Europe (read Eurobonds). Difficult to find consistency between these two requests.
