EU stability pact, gray smoke: new round before Christmas

The Ecofin marathon has not yet produced the agreement

Eight hours of nocturnal marathon negotiations were not enough for the EU Finance Ministers, locked in the Europa Building from 7pm until almost 4am, to sign the Immaculate Conception pact. Negotiations on the reform of stability and growth pact they did not lead to an agreement among the 27, but all is not lost. According to the European Commissioner for Economy Paolo Gentiloni, “substantial steps forward” have been made, even if “the mission is not yet accomplished”. However, an agreement is a matter of “days”. Economy Minister Giancarlo Giorgetti is more cautious, speaking of “weeks” needed to reach an agreement defined in detail.

For the German Christian Lindner, if yesterday before the dinner the agreement with Bruno Le Maire’s France was on “90%” of the reform, now we are at “92%”. For Gentiloni, an agreement before the end of the year is “achievable. We are really close”, he said. In the long nightly discussion at the table “I didn’t see anyone with the intention of killing the negotiation”, he observed. “Of course, we still have to finalize the discussions: there are not only technical aspects, but also some problems, especially on how to ensure that there is enough space for investments. There are still slightly different views, but I am quite optimistic that We’re getting there. It’s a matter of days.”

Also the Minister of Economy Nadia Calvino, who today was chosen as the next president of the EIB (“an excellent candidate”, for Giorgetti, even if Italy had “its own”, the former Minister of Economy Daniele Franco ), said she was optimistic: “We’re almost there,” he said, announcing a possible extraordinary Ecofin for the week after the European Council of next week: for Giorgetti the meeting, which should be the “final” one, is announced between “the 18th and 21st” of December; it could be held, according to what we understand in Brussels, on the evening of 19 December.

The issue that still needs to be fully resolved is this: what happens to the countries that end up under procedure for excessive deficit? Next year there will be at least ten, it is expected, among which Italy and France will almost certainly be. Therefore, these countries will have to make a correction of the structural deficit (the structural balance is the balance between income and expenditure that a government would record under current policies, if the economy was operating at its full potential, i.e. realizing its potential GDP, which is a theoretical estimate) equal to 0.5% per year. With the 2024 budget, Italy makes a double correction, of one percentage point, so much so that Giorgetti noted that the budget is already in line with the trajectories required by the Venture rules.

The problem is that, given that interest rates, and therefore the yields on government bonds, have risen in recent years, and therefore the debt service, i.e. the cost of interest that a state must pay to repay those who have given credit, will tend to increase in the coming years. Therefore a highly indebted country, such as Italy but also France, could find itself forced to cut precisely those investments that it should make, to face the green and digital transition and defense spending, necessary to help Ukraine, which is fighting against the Russian invaders. It is no coincidence that Giorgetti this morning underlined that the “progress made” on the reform of the stability pact “testifies that there is a recognition of the fact that we are not in a normal situation: there is a war in Europe”.

The ‘turning point’, according to what we learn in Brussels, came around two in the morning, when the Frenchman Bruno Le Maire and the German Christian Lindner met to resolve the issue. The two have excellent relations, also favored by the fact that Le Maire speaks German very well. The compromise, condensed in recital 24-bis of the proposal on the corrective arm, provides flexibility for countries under excessive deficit procedure, linked to the increase in interest rates: in practice the Commission, with which each country must negotiate its spending path will take into account the burdens linked to higher interests, in tracing the adjustment trajectory of the country under procedure, to avoid the latter having to cut the very investments it should make to respect EU priorities. Germany has accepted that there is this flexibility under the procedure, to avoid the EU shooting itself in the foot, cutting precisely when it is necessary to invest so as not to be definitively outclassed by the USA and China; France, for its part, accepts that this flexibility is temporary, limited to the years 2025, 2026 and 2027.

Having found this agreement, Le Maire and Lindner spoke about it with Nadia Calvino, who said she agreed with the compromise, after which, around half past two to three in the morning, Minister Giorgetti also accepted the award. Thus a consensus is formed that brings together four major countries. For Giorgetti, however, the temporary nature of flexibility should be removed: the minister pointed out, as Mario Draghi had already done when he was prime minister, that the EU, if it continues to set itself ambitious objectives, must also equip itself with the means to achieve them, so that they do not remain “noble wishes”, destined to remain on paper. “We are living in exceptional circumstances – underlined Minister Giorgetti – and we believe that a transitional period is needed to take these exceptional circumstances into account”. This consideration, however, does not please a series of medium and small countries, more ‘hawkish’ than Germany: among these there are certainly Sweden, Finland, Holland and Austria, which have made very harsh interventions. Now Berlin should take it upon itself to convince them to settle for a compromise, leveraging the fact that the rules of the deficit procedure are not being changed: it is a transitional flexibility.

The negotiation is not over: even the preventive arm, with the analysis of debt sustainability, which will be the basis of the multi-year plans designed for the States, absorbs a lot of energy. The simplification of the framework essentially lies in the fact that it will be necessary to observe a net expenditure path, compliance with which will be monitored via a control account, which provides for certain thresholds. However, horizontal safeguards are introduced, both on debt reduction and on the deficit, desired by Germany, which Italy accepted, because it “does not complain”, with respect to the duty to guarantee “fiscal sustainability”, underlined Giorgetti. Technical work is still needed, explains a European diplomatic source: we are proceeding “step by step”. There does not seem to be a need for an in-depth debate in next week’s European Council, except, probably, for the hope that the ministers will conclude the agreement: Minister Giorgetti replied that it is up to the Finance Ministers to find the “resources” necessary to realize the political priorities identified by the leaders. “I reiterate that, if next Thursday governments continue to maintain high standards of European ambitions, European fiscal rules must be adapted to these standards of ambition”, he remarked.

The framework being negotiated appears far from simple, but it is the result of a 27-party compromise. Whether this new regulatory framework is what the Union needs to truly play the geopolitical role it verbally aspires to, remains to be seen. It is well established that the ‘old’ stability pact accompanied the accumulation of an enormous delay towards the USA, and also towards China. As the European Council on Foreign Relations noted, in 2008, the year of the bankruptcy of Lehman Brothers, the EU economy, which has many more inhabitants than the Atlantic giant, was only slightly larger than the American one: 16.2 trillion dollars, against 14.7 trillion dollars. By 2022, the US economy had grown to $25 trillion, while the EU and UK combined had only reached $19.8 trillion. The US economy is now almost a third larger and is more than 50% larger than the EU, without the UK. The ‘old’ stability pact caused a chronic lack of public investment. Time will tell whether the stability pact that ministers will find under the tree in Brussels, assuming that an agreement is actually reached, is a real Christmas present for Europe or a ‘recycling’, a re-edition of the old pact with a a little make-up. Hoping it’s not just a simple package.