EU ahead on stability pact reform, but “the devil is in the details”

Vice President Dombrovskis: “Proposal at the end of October, we need to discuss in depth”

Among the EU finance ministers there is a “rather broad convergence” on the reform of the stability pact, limited to the objectives and broad lines, but now the discussion will have to become more detailed and “the devil is in the details”. To take stock of the reform process started after the shock of the Covid-19 pandemic was the executive vice president of the European Commission Valdis Dombrovskis, at the end of the informal Ecofin meeting in the Congress Center overlooking the Nuselsky Most, in the Vysehrad district, one of the oldest in Prague.

The guidelines to be followed by the modification of the regulatory framework on public finances are clear: the “priority” is ensure the “sustainability” of the debt public, through “budget adjustments” and “reforms”, but also with “investments”.

“Progress needs to be made in the review,” says Dombrovskis. “Since we launched the discussion almost a year ago, we have identified some fundamental problems.” The primary objective is to ensure that public debt “actually falls, especially when it is high, even when the economic situation is positive, by paying attention to the composition and quality of public finances”, given the current “high investment needs” for ecological and digital transition and for “collective security”.

For Dombrovskis we must then “reduce complexity“of the rules and” improve compliance “, that is to say compliance with the rules. There seems to be a” broad convergence “among ministers on these priorities,” so we are confident that we will be able to move forward, on the basis of the guidelines that the Commission will publish later, towards the end of October “.

The first objective, he continued, “remains to ensure the sustainability of the public debt. This will require budgetary adjustments, reforms and investments”. These three elements together “should allow for a realistic, gradual and sustainable reduction of public debt” in relation to GDP.

Secondly, given the “diverging” levels of debt between Member States, “there can be no one-size-fits-all solution”. Practically, the debt rulewhich prescribes the annual reduction of public debt to the extent of one twentieth of the share exceeding 60% of GDP, it seems destined to be archived. There may be, says Dombrovskis, “more room for maneuver for states, but within a common framework of rules”.

Third, this room for maneuver “must be accompanied by more robust enforcement in the event of non-compliance with the rules”. Finally, as regards simplification, we should “focus” on “observable” indicators as a “parameter of public expenditure”, and no longer on controversial indicators such as the output gap, derived from potential GDP.

Even if there is “relatively high convergence” among member countries on how to proceed with the revision of the stability pact, the vice president explained, there remain different “nuances” between the capitals. Some “emphasize more the aspect of debt sustainability”, others “emphasize more the need for more flexibility and room for maneuver for Member States”. Therefore, the road is not entirely cleared: now “the devil is in the details”. With the “communication” at the end of October “we will provide more details”, which will allow “a more detailed and nuanced discussion: there we will see how to reconcile the different opinions”.

The “communication” will be prepared “also taking into account today’s discussion and the various contributions that States have made to the discussion during the previous months”. For Dombrovskis “it is feasible” to have the new rules in place before the general safeguard clause, activated in the spring of 2020, which suspends the application of the rules, is deactivated at the beginning of 2024, “but it depends on how the consensus it will emerge among the member states “.

Among the countries, Dombrovskis continues, “there is a relatively broad agreement on the main guidelines”. In this sense, “everyone is on board”, but the question “is what happens when the discussion becomes more detailed”. It could get “more complicated”, but now, he points out, “we have to go into this discussion in more detail. That is why we are preparing the communication.”

Economy Commissioner Paolo Gentiloni spoke of reputational sanctions, that is to say that there is no need for fines, since the markets are there to punish the ‘reprobate’. Dombrovskis seems to agree: “We know that in the end one of the elements is market discipline and how the markets react to budgetary performance – he says – is an issue that was raised again today during the discussion at the Ecofin table” .

From this point of view, “having a credible regulatory framework and applying it can improve the perception of the markets and the financing conditions of the Member States”. From this point of view, “we can also speak of reputational aspects”. In this context, the European Commission is preparing to work “as before” with the next Italian government, even in the absence of Mario Draghi, says Dombrovskis.

In the EU, he notes, “there are 27 democracies”, in which “elections are held, governments change and prime ministers change”. So after the vote on 25 September in Italy “we must be able to work as we have done before and as we will do in the future”. Even for the Czech Finance Minister Zbynek Stanjura, who plays in the ODS, a Czech party member of the European Conservatives and Reformists (chaired by Giorga Meloni), the fact of having a new prime minister in Italy “shouldn’t have an influence” on the debate on the reform of the rules, because in the discussion “we are not starting from scratch”.

All the other 26 EU members, beyond the declarations on the record, look at least with “interest”, as Gentiloni said, at the result of the Italian elections. German Finance Minister Christian Lindner, approached today on the sidelines of the Ecofin in Prague, declined a question about the Italian elections, explaining that not wanting to “interfere” in a democratic process underway in another European country. But he has promised that he will not fail to have his say after the vote, in Brussels.

(from the correspondent in Prague Tommaso Gallavotti)