The idea is to reform a system of rules by making them more reasonable and elastic, rather than rigid and effectively unobservable. The Stability Pact, i.e. this set of rules, was suspended in 2020 due to the pandemic and the suspension continued for the next three years after the outbreak of war in Ukraine and the resulting energy crisis
The impression is that an agreement will be found by the end of next week. And therefore the European Union will be able to reform those budget rules that every country should respect to be part of the Union. The best-known parameters that each EU member should aim for are those of the ratio between deficit and GDP, which should remain within 3% and the ratio between public debt and GDP, where the former should not exceed 60% of the latter.
Objectives and parameters
As is known, a large part of European countries not only fail to respect these criteria, but are also unable to implement economic policies that comply with the continuous recommendations of the Commission which continually asks to fall within these parameters. For those with a particularly high debt/GDP ratio, such as Italy, the current rules provide that every year they must reduce their deficit by one twentieth. An operation never succeeded by our country.
The idea is therefore to reform a system of rules by making them more reasonable and elastic, rather than rigid and effectively unobservable. The Stability Pact, i.e. this set of rules, was suspended in 2020 due to the pandemic and the suspension continued for the next three years after the outbreak of the war in Ukraine and the resulting energy crisis.
What will happen
From 1 January 2024, however, the pact will return into force and the European Commission presented its reform proposal months ago which, in fact, in its intentions should allow each State a tailor-made return path spread over time. However, the Commission’s proposal must be approved and possibly modified by the 27 member states who must decide by the end of the year.
And as always in the EU, the tug of war has begun between those who want more flexibility, the possibility of spending more, and a longer path to debt repayment, Italy first and foremost, and those who are concerned about keeping accounts and respecting the budget rules to avoid having to face a new debt crisis, Germany and the Netherlands are among the leaders of the latter.
Italy asked that expenses for the green and digital transition and military expenses not be counted in the calculation of debt and deficit, as well as the investments of the Pnrr, but this does not seem possible. What our country is aiming for, by siding with France, is that these expenses contribute to greater benevolence on the part of the European Commission when the return to the required parameters needs to be discussed.
On the other hand, the personalized return method negotiated by each individual country with Brussels seems to be accepted. However, it is not clear whether the most rigorous countries will accept that the time needed to return to the parameters could be up to seven years, as envisaged by the Commission and also supported by Italy.
The three elements to evaluate
There is no point in dwelling on the individual details that will be the result of negotiations in the coming hours and days. However, it is important to note some elements that will play a vital role in the negotiations.
First. It seems like everyone wants to come to an agreement. The rigorists, because they rightly note that, as it is, the Pact does not work and too many do not respect it. Those who are in debt, because they judge the reform under discussion to be in any case better and less rigid than the current rules.
Second. Germany, which obviously has a central role, is suffering from the crisis of the liberal party which is in government and is losing support. Its leader, Lindner, is the finance minister, and to make up for lost votes he has returned to very rigid positions despite the economic crisis and recession that has hit his country.
Third. Many states, including Italy, have granted bonuses and public contributions during these years of crisis which will necessarily still weigh on public budgets, preventing a reduction in debt in the short term.
There will be very long and complex hours of negotiations, both in the meetings of finance ministers and in those between the heads of government. Certainly after years of easing the rules and after the experience of the Recovery Fund which for the first time granted individual countries money financed by common debt, the Nordic countries now have many arguments to ask that, after a period of loose ends, go back to paying attention to the rigor of public accounts.