There is agreement on the new Stability Pact: debt flexibility in exchange for reforms

Brussels. Multi-year tax plans tailored to each country’s situation, more time to reduce debt for those who make reforms and investments in line with EU objectives, and more effective sanctions, albeit reduced, for those who violate the budget rules. These are the main points of the agreement reached by the sherpas of the finance ministers of the European Union on the main principles of reform of the Stability and Growth Pactwhich should be confirmed by next week’s Ecofin and by the European Council of 23 and 24 March.

The keywords are “realism”, “ownership” and “multi-year”. The rules that were introduced during the sovereign debt crisis between 2010 and 2012 were never really applied and are no longer adequate today in the face of “the many short and long-term economic and social challenges”. Which? The list contained in the draft agreement which should be approved by Ecofin is long: “Increased geopolitical tensions, high inflation and rising interest rates, climate change, digitalisation, demographic change, the need to support competitiveness and strategic autonomy in an open economy, the importance of ensuring affordable energy and security of supply, and the necessary strengthening of defense capabilities. Many of these challenges require ambitious reforms and substantial investments,” the draft says, that the Sheet was able to consult. “Furthermore, the pandemic crisis as well as the aftermath of the Russian war against Ukraine have contributed to further increasing already high debt levels, which need to be reduced in a gradual and realistic way.” According to the draft, Ecofin should recognize that “national ownership is an essential element of an effective economic governance framework”. In other words, it is not Brussels that must dictate to the governments what to do, but each government that must take responsibility for its budget choices within the framework of the common rules.

In concrete terms, how will the Stability and Growth Pact change? The draft speaks of “areas of convergence” between member states. There is no agreement on everything and several open points remain, some of which are very technical. The parameters of 3 per cent of GDP for deficits and 60 per cent of GDP for debt remain the same. The structural net balance will be abandoned. The only operational indicator will become primary net expenditure. All member states will have to present medium-term national plans that include fiscal policies, reforms and investments. But national plans will have to be consistent with a “technical fiscal trajectory” set by the Commission, which must ensure that debt is on a sufficient downward path (or remains at prudent levels for countries whose value is below 60 per cent of GDP). The Commission itself will have to dialogue with each government to verify whether the deviations between the national plans and the technical fiscal trajectory set in Brussels are “justified”. The plans will need to be approved by Ecofin and can take into account election cycles, with updates when a new government is installed. The agreement between the Sherpas provides for the possibility of introducing “common safeguards to ensure sufficient debt reduction” and to prevent budgetary deviations from accumulating over time. But the most significant novelty is the possibility of extending “the fiscal adjustment period” (i.e. the pace of debt reduction, ed) if a member state commits to reforms and investments that “strengthen growth prospects or resilience, strengthen public finances and thus their long-term sustainability, and address EU strategic priorities, including public investment challenges for the green and digital transitions and capacity building of defense”. European priorities are the key to discounting budgetary effort: it is not a golden rule on numbers to exclude investments from the calculation of the deficit, but it is a golden rule on timing to give more fiscal space to high-debt countries.

On the sanctions front for those who do not respect the rules, nothing changes for the excessive deficit procedure for those who violate the 3 per cent of GDP deficit limit. The procedure for those who exceed 60 per cent of debt in the event of a “deviation from the agreed budgetary path” also remains, even if the text remains vague on when it should be triggered. In any case, enforcement of the rules should “be made more effective, including through increased transparency. The initial monetary amount of financial sanctions should be reduced to allow for more realistic enforcement,” the draft says. The agreement between the Sherpas also provides for clarifying the functioning of the “general escape clause” to suspend the application of the Pact in the event of a shock in the euro area or in the EU. Also new is the green light for “a country-specific escape clause” which “should allow for temporary deviations from the fiscal adjustment path in the event of exceptional circumstances beyond the government’s control with a major impact on the public finances of a single member state”.

The draft indicates which points are still open, on which the 27 will discuss after the Commission has presented its legislative proposal to reform the pact. There is “need for further clarification and discussion also regarding the definition of the Commission’s (fiscal) trajectory, the requirements for member states that are deemed to have low debt problems (…), the definition of aggregate expenditure , the adequacy and definition of common quantitative benchmarks supporting the reformed framework, the principles for the extension of the fiscal path, the role of country-specific recommendations, the application of national plans and the incentives for reforms and investments”. In short, much work remains to be done for a definitive agreement. And, in the Stability and Growth Pact, the devil is in the technical details.