EU, progress on stability pact reform: objective to close in November

The negotiation will not be easy. The division between hawks and doves, between Frugals and Mediterraneans, still exists, but the positions “have changed”

THE EU finance ministers are ready to work to find a compromise on the reform of the stability pact, entering the political negotiation phase to resolve the issues still on the table, with the aim of finding an agreement by the end of the year. The Spanish Minister of Economy, Nadia María Calviño Santamaría, ‘Galician’ by birth, entrusted herself to the sacred aura of the city where, according to the Golden Legend, the remains of the apostle James, the first martyr among the twelve disciples of Jesus, and he won the bet. During the informal Ecofin held yesterday at the Cidade de la Cultura in Santiago de Compostela, in Galicia, explained the Commissioner for Economy Paolo Gentiloni, “I saw an awareness, a great work by the Spanish presidency, a willingness on the part of all the countries to intensify work and have an attitude of willingness to compromise. These are two very positive things: we thank Santiago.”

The EU countries, confirmed Calviño, “are all open to trying to find a consensus” on the reform of the stability pact and “to making commitments that will help us find this consensus before the end of the year”. For the minister, candidate for the presidency of the EIB, the fact that the ministers’ meetings were held in Santiago “was a very positive element”, which was “underlined by many participants. I am sure that many will return” to the Galician capital, a pilgrimage destination for centuries. And you, in the press conference, suddenly asked the vice president of the Commission Valdis Dombrovskis: “And you, Valdis, will you return to Santiago?”.

The Latvian politician, caught off guard by his Iberian colleague, blushed slightly, smiled and said yes. The aura of the city of San Giacomo, however, must have touched him too, as well as the ministers, because shortly afterwards he even made a joke in the press conference. An absolute first, in living memory, for Dombrovskis, a Physics graduate from the University of Riga. The European Commission, he said, raising smiles in the room, “supports the Spanish presidency on the ‘fiscal journey'” of Santiago, towards reform of the stability pact.

Jokes aside, Dombrovskis explained that the Commission “welcomes” the Spanish presidency’s ambition to reach an agreement by the end of the year, adding however that “it could be complicated”. Nobody, explains a qualified EU source, thinks it is an easy undertaking, because the divisions between the countries still exist, “but we think it is feasible”. And the reason is simple: everyone is aware that, if the old rules of the stability pact were to come back into force, the Union would have to face “a series of problems” of no small magnitude, starting with the reaction of the financial markets.


The negotiation, however, will not be simple. The issue, explained the Spanish minister, is twofold: it is necessary to “find the right balance between, on the one hand, maintaining revenue flows to reduce the debt/GDP ratio and guarantee fiscal and financial sustainability on a medium and large scale and, at the same time, incentivize and protect the necessary space for investments that respond to European needs and the incentive for the necessary reforms”. The second horn of the problem is how to “ensure that we have common rules that are exhaustive and that protect equality of treatment between different countries”. But the fact that all the countries are ready to negotiate, with the aim of closing an agreement by the end of the year, is already a result, because it was feared that some were actually aiming to make melina, waiting for the deactivation of the escape clause.


In this context, the Minister of Economy Giancarlo Giorgetti has revealed his cards: he has asked, sources from the Mef have reported, to be allowed to separate from the calculation of the deficit the military expenditure made to support Ukraine and the investments for the Pnrr, until 2026, the year in which Next Generation Eu will come to an end. It is a request that makes sense, not only to Italian ears: even in Berlin they understand that, in the absence of incentives for this type of necessary investment (unless they want to leave Kiev at the mercy of Moscow, without help), the risk, very concrete, is that member countries cut these expenses. Faced with the alternative of cutting spending to help Ukraine or stopping helping it, they might be tempted to choose this second option. Especially since military aid is not well received by a significant segment of public opinion, especially in some countries.

Not to mention the PNRR loans, which also serve to finance the green and digital transition: without incentives, a country might think twice before going into debt. Mario Draghi himself had warned that, in the absence of preferential treatment for some investments, they simply would not be made. According to an EU source, during the debate all the ministers were “super-constructive”, but the distance on how to technically ensure preferential treatment for certain types of investments remains, because for the Germans, and not only for them, the debt debt remains.

Furthermore, the objection was raised that introducing exceptions would complicate the rules, rather than simplify them, even if the level of complexity of the old rules was such that to be applied they required a handbook of over 100 pages, little or not at all comprehensible to non-specialists , so much so that Commissioner Pierre Moscovici confessed to feeling embarrassed at having to go into the press room to explain rules that were very difficult for the vast majority of the population to understand. Germany is not isolated in its positions, even if it no longer has the Netherlands at its side, which with Sigrid Kaag has assumed an autonomous position in dialogue with the Mediterranean front (the negotiations on the reform have been unblocked also thanks to the non-paper prepared by her and her Spanish colleague Calviño some time ago).

Even if German minister Christian Lindner is the most visible of the ‘rigorous’ front, he has Finland and Sweden at his side, explains an EU source. And other countries too: as many as ten co-signed with Lindner an op-ed last June on the reform of budget rules (Austria, Czech Republic, Bulgaria, Denmark, Croatia, Slovenia, Lithuania, Latvia, Estonia and Luxembourg), in which it was argued, among other things, that geopolitical challenges should not be used as an excuse to increase public debt.

However, explains a high-level EU source, the Covid-19 pandemic and the war in Ukraine have changed the picture: there are countries that have to go into greater debt not because they want to build a particularly generous Welfare State, but because they are forced to do so in order to national defense reasons. For example, the Baltic countries, which experience Russia as an existential threat, even more so since Vladimir Putin launched the large-scale invasion of Ukraine.

While once the debate on these issues was often “harsh”, now the tone is different. Even among the so-called “hawks”, there is greater understanding of the reasons for those who must issue more debt to defend themselves from the Russian threat. In short, the division between hawks and doves, between Frugals and Mediterraneans, still exists, but the positions “have changed” and the debate “is still difficult, but it doesn’t have that very sharp character it once had”. Italy, meanwhile, indicated today that it would prefer the same rules for everyone, rather than tailor-made debt reduction paths, to avoid the risk of classifying member countries, dividing them between diligent and less diligent. This is a position that may have been appreciated by the ‘rigorists’, who fear that the Commission is too lenient with the most indebted states.

Whether this new atmosphere will allow us to reach a compromise by the end of the year will be seen in the coming weeks: the objective is to have a draft agreement on the Ecofin table in October, to close the technical details in November. The regulation should then pass through the trilogue, to be voted on in the Parliament plenary in March or April 2024, in time for countries to start preparing budget laws for 2025.