After several postponements and just as many controversies, the EU commissioner for the Economy Paolo Gentiloni and the vice president of the EU Commission Valdis Dombrovskis they presented the wait reform of the Stability and Growth Pact aimed at overcoming the old rules, establishing clearer and more flexible rules aimed, on the one hand, at favoring debt reduction, on the other at preventing the repayment path that all states must follow from weighing on growth and investments. The Pact, it must be remembered, is currently suspended: the stop came in March 2020 to allow individual member states to loosen the reins to deal with the economic emergency triggered by the Covid pandemic. As expected, it should restart in January 2024 and the will of Brussels is to restart the engines with the new rules.
“We believe we have a balanced proposition“, said Commission Vice-President Valdis Dombrovskis. “Our proposals represent a balanced approach that will make EU tax rules more effective. They are structured around four key areas: simplicity, ownership, guarantees and enforcement,” he continued.
Reform of the Stability Pact: the new rules proposed by the EU Commission
The reform proposal presented on Wednesday gives the Member States more time to reduce public debt, but also provides a closer surveillance on budget commitments and above all tougher conditions for the most indebted countries, as is the case of Italy. Safeguards are in place if the agreed plans are not met. All with the aim of leave room for investment without providing for the exclusion of certain types of expenditure (without the classic "golden rule"). These are the principles of the reform of the Stability Pact presented today and which will begin to be discussed by finance ministers at informal meetings in Stockholm on Friday. Parameters that try to please everyone: both the penalty takers from Berlin and the states, such as Italy, which have been asking for a relaxation of the legislation for some time. The goal is to get to the heart of the matter next autumn and get to the green light by the end of the year.
The Maastricht parameters on deficit and debt remain
The Maastricht parameters relating to the will remain unchanged with respect to the old Stability Pact 3% deficit and 60% public debt of GDP. The rule according to which countries with deficits exceeding 3% will have to make a minimum budget adjustment of 0,5% of GDP per year until they reach the target will also remain in force. A prescription that seeks to find a compromise between the different positions and especially of convince Germany not to directly cage the reduction of debt/GDP at a pre-established rate year by year, so as to curb the "intemperance" of the most indebted states.
In order to reward the so-called "national ownership”, it will be up to the individual Member States to define the medium-term objectives (4 years) on investments, reforms, macroeconomic objectives and on the way in which they intend to tackle the imbalances, indicating only an expenditure indicator. The plans, which can be extended by 3 years, will be evaluated by the EU Commission and approved by the Council. Annual progress reports should then be submitted each year.
primary public spending
In order to simplify the fiscal rules, primary government expenditure will be the only operational indicator for budgetary surveillance. These are the multi-year expenditure targets which will form the basis for the European review for the entire duration of the member state's medium-term budgetary structural plan.
the most indebted states, the EU Commission will publish an adjustment plan. States with a deficit of more than 3% of GDP or a debt of more than 60% of GDP will have to ensure that the debt has a plausible decline or remain cautious in the plan and that the deficit falls or remains below 3% in the medium term: the executive speaks of it as “technical trajectory”. Member States benefiting from an extended fiscal adjustment period will also need to ensure that the fiscal effort is not concentrated only on the last few years, but spread out over the whole plan period. Finally, net spending growth will need to be kept below their medium-term economic growth.
Instead, the parameters relating to the cut of one twentieth a year of the part exceeding 60% of the debt/GDP, the one for the reduction of the structural balance, the procedure for significant deviation and the matrix of fiscal adjustment requirements will disappear.
Secondly, the annual monitoring by the Commission will be less burdensome. Instead of proposing year-by-year recommendations, Brussels will focus on compliance with multi-year spending targets. Finally, another important novelty, the reform will simplify the "execution" procedures, which would be triggered by slippages from agreed multi-year expenditure targets for “debt-based” excessive deficit procedures.
Last important clarification for Italy: for Member States facing significant public debt problems, deviations from the adjustment path will automatically lead to the opening of a excessive deficit procedure.
The safeguards
The EU Commission's proposal to reform the Stability Pact confirms the possibility of activating general safeguard clauses in the event of a severe economic downturn in the EU or the euro area which will allow for deviate from spending goals. They will also be provided country-specific safeguard clauses in case of exceptional circumstances beyond the control of the Member State with a material impact on public finances. The Council, on the basis of a recommendation from the Commission, will decide on the activation and deactivation of these clauses.
Gentiloni: "A new chapter opens for states to have more leeway"
The EU economic governance reform proposals “promote a greater national ownership through medium-term structural budget plans prepared by the Member States, within a common EU framework with sufficient guarantees", said EU Economy Commissioner Paolo Gentiloni, according to whom the new rules guarantee "simultaneously the equality of treatment and consideration of the specific situations of individual countries”.
The rules will allow “a more credible application” giving “the Member States a greater leeway in the definition of budgetary trajectories”. The proposed reform of the EU Stability Pact takes "into account the different initial budgetary positions of the member states and their different public debt challenges", said Gentiloni
The proposals, he added, “will facilitate reforms and investment commitments, underpinned by an adjustment path. They should encourage growth, support fiscal sustainability and address common EU priorities”. Also “They should ensure that the overall level of public investment nationally funded for the entire duration of the plan is higher than in the previous period. And this is obviously a very significant innovation compared to the current framework”.
"IS in the interest of all Member States. It would reassure the financial markets and investors. It would give governments clarity on the way forward, also considering the deactivation of the 'general escape clause' at the end of this year", said Gentiloni, according to whom "While on the one hand the proposals provide Member States with greater control over the their medium-term plans, they also provide for a stricter enforcement regime to ensure that Member States meet their commitments. For Member States facing substantial public debt challenges, deviation from the agreed fiscal adjustment path will automatically lead to the opening of an excessive deficit procedure.
“We believe the proposal is balanced” but “with a proposal from the Commission, the legitimate differing opinions of the Member States can have a way of progressing”, he concluded.
