EU launches the new stability pact, the news

The European Commission has presented in Brussels the eagerly awaited legislative proposals to reform the EU economic governance framework

A more “balanced” stability pact, but also with more “effective” rules, which envisage a “more gradual” reduction of the debt than that required by the rules still in force but suspended in 2020. A framework which, according to the Commission, the “reforms” and “investments” that the EU badly needs in the new geopolitical context. To quote the commissioner Paul Gentilonithe old stability pact “has had its day” and Europe cannot resign itself to a picture of “low growth” and “high debt”. The European Commission has presented in Brussels the eagerly awaited legislative proposals to reform the EU economic governance frameworkjust in time to allow the finance ministers to have a first exchange, or at least to position themselves in view of the negotiations in the Council, in the Ecofin and in the informal Eurogroup this weekend in Stockholm.

Formally, according to what has been learned from EU sources, the dossier will not arrive at the Ecofin table before June, because the expert-level technical work needs to be done first, which could start as early as next week. The Commission’s proposal in Stockholm is not on the agenda but, explained a senior EU official, it is “closely followed” and will certainly be “discussed on the sidelines”. The legislative proposals introduce several innovations compared to the framework that was suspended in March 2020, when the EU was hit by the Covid-19 pandemic and the States had to subsidize their economies, forced to close, to avoid desertification. In essence, the Member States that breach the ceilings of 3% of the deficit/GDP ratio and/or 60% of the public debt/GDP ratio will have to comply with specific medium-term budgetary trajectories which ensure a reduction of the deficit below 3 % and put debt on a stable downward path. The plans will be over a four-year period, which can be extended to seven in exchange for investments and reforms in line with EU priorities.

The resulting fiscal adjustment will certainly be “more gradual” than that required by the rules suspended in 2020, underlined Economy Commissioner Paolo Gentiloni, and for this reason even more credible. The former Prime Minister reminded those who noticed that the proposal seems to have taken into account the concerns of the Nordic countries that the Commission does not have only “Italians”, nor “only doves”. Furthermore, as a senior EU official observed, the Commission must put proposals on the table on which it is possible to reach a “consensus” among the member states, which, as Gentiloni recalled, still have “different” positions on this matter. For the former prime minister, after more than three years of work (the Commission’s first approach to the reform of the stability pact dates back to before the pandemic), a “point of convergence with which I am very satisfied”, because “I have worked a lot”.

The adjustment path outlined by the Commission will be tailor-made for each state, but will also include a ‘horizontal’ requirement for countries with deficits above 3% of GDP: a minimum annual adjustment equal to 0.5% of GDP, a level that according to an EU source Italy will surely exceed in the event of a four-year adjustment and which, in the event of an adjustment spread over seven years, would be “around” that figure for a “significant” period of seven years. The president of the ID group Marco Zanni has published a table via social media according to which Italy would be asked for an annual adjustment equal to 0.85% of GDP, around 15 billion euros, in the case of a four-year trajectory, and on average 0 .5% per annum for the first four and 0.25% for the last three in the case of a seven-year trajectory (which is what Italy will probably aim to achieve). There is no ‘golden rule’, i.e. a special treatment for ‘green’ investments, for those in digital or defence. However, member countries will be able to request an extension of the return trajectory, from four to seven years, if they implement reforms and investments in the field of the green and digital transition or for defence. For Gentiloni, it is “another way” to obtain “more or less the same result”.

Whether this will be enough for the EU to make the enormous amount of investment needed to address the green transition and to increase military spending, as NATO requests, to a level capable of credibly addressing the resurgent Russian nationalism, it is all to see. However, a senior EU official has noted that these investments, if they are not “sustainable”, will simply not be made in the end. Not worrying about the “sustainability” of government debt, he noted, would ultimately lead Europe’s economies to “crash”. The goal of the reform is to make the stability pact “as coherent as possible” with the agenda of EU priorities, bearing in mind that “the climate is not the only one”.

For the Minister of Economy Giancarlo Giorgetti the Commission’s proposal is “certainly a step forward, but we – he underlines – strongly asked for the exclusion of investment expenses, including those typical of the digital Pnrr and the Green Deal, from the calculation of the target expenses on which the compliance with the parameters. We acknowledge that this is not the case. Each investment expenditure, since it is relevant and produces debt for the new pact, must be carefully evaluated. Therefore, it is necessary to give priority only to expenditure that actually produces a significant positive impact on GDP”. On the one hand, the Commission is asking to invest in the green and digital transition, but on the other, as Valdis Dombrovskis has said several times, debt is debt’, therefore investments in line with EU priorities are also counted for the purpose of assessing the compliance with budget parameters: a contradiction remains, and it remains to be seen whether extending the adjustment trajectory to seven years will be enough to resolve it.

The proposed reform also provides a radical simplification of the parameters: we move on to a single indicator, that of the trend of net public expenditure, setting aside the plethora of unobservable indicators that characterize the regulatory framework still in force (and only suspended). Parameters such as the reduction of the structural balance and the matrix of requirements for fiscal adjustment, which are understandable only to technicians and in some cases even disputed, because they are the result of partly arbitrary estimates, are now at least formally invalid. However, “potential growth will be part of any assessment of debt sustainability,” a senior EU official noted. Simplification also entails greater cogency of the regulatory framework: the parameter of net public expenditure, underlined Executive Vice President Valdis Dombrovskis, is “observable” and under the “direct control” of governments, which therefore will have “no more excuses” for not fulfilling the commitments made.

The The new regulatory framework will also make it easier to impose sanctions on countries that do not comply with the rules. Not only. The debt procedure, never activated so far because it is equivalent to an “atomic bomb”, will be made more easily applicable, lowering the sanctions envisaged and thus making it practicable. For Member States, the revised framework should be less procedurally burdensome: instead of issuing annual budgetary recommendations, the Commission will focus on compliance with spending benchmarks. Countries will have to submit annual reports, focusing on implementation rather than planning. Safeguard clauses are envisaged for the temporary suspension of the rules, both at EU and national level, which would be triggered in exceptional cases (as happened with the Covid-19 pandemic).

Now the legislative proposals will be discussed by the Member States: the goal is to conclude the legislative work by the end of the year, which is also convenient for the countries, Gentiloni underlined, since at the beginning of 2024 the safeguard clause will be deactivated. A senior EU official believes that there is “enough time” for the states to position themselves and confront each other, agreeing on a negotiating position “by the end of the year”, which would kick off the interinstitutional negotiations in the trilogue, once the European Parliament he will have agreed on his own. The head of delegation of the Pd Brando Benifei underlined that the Chamber is ready to work on it immediately. The first party of the government majority, Brothers of Italy, has expressed a cautious position but ready for negotiations to improve the proposal, while complaining about the stiffening compared to the initial hypotheses (the result of pressure from Germany, which however did not obtain all asking). Holland, leader of the Frugals, has welcomed the proposal, hoping it will lead to the reduction of the debts of the most indebted countries.