EU, the new Stability Pact is underway: 7 years to reduce debt and deficit. Italy doesn't vote for him: chaos in the majority


By John

The European Parliament has given its definitive green light to the reform of the Stability and Growth Pact. One of the most important votes of this legislature, expressed in the last plenary meeting of this mandate. The Italian parties, however, in an anomalous unity, abstained. The delegation of the 5 Star Movement was excluded and opted for a clear opposition.

The majority parties – arriving with the responsibility of having negotiated and accepted this Pact in the Council – did not vote in favor “because many critical points remain”. The Democratic Party abstained “so as not to approve a pact negotiated by the Meloni government”. Even though the European Commissioner for the Economy proposed it, Paolo Gentiloni. The explanation – provided by the national secretary Elly Schlein in recent weeks – is that this is not the Pact presented by the Commission, it has been heavily modified by the States on the Council table.

“I imagine there are internal political reasons,” Gentiloni replied to journalists who asked him questions on the matter. “We have united Italian politics,” he joked, referring precisely to the fact that no delegation voted in favor. The Compact will now need to be signed into force with a vote by the Council, scheduled for the Council meeting on April 29. It will be up to the agriculture ministers.

The regulation amending the corrective arm of the PSC with 368 votes in favour, 166 votes against, 64 abstentions and the directive amending the requirements for Member States' budgetary frameworks with 359 votes in favour, 166 votes against, 61 abstentions. MPs have strengthened rules to support a government's ability to invest. It will now be more difficult for the Commission to subject a Member State to an excessive deficit procedure if essential investments are underway. All national expenditure for the co-financing of EU-funded programs will be excluded from the calculation of a government's expenditure, thus creating incentives for investment.

Countries with excessive debt will be required to reduce it by an average of 1% per year if their debt is above 90% of GDP, and by 0.5% per year on average if it is between 60% and 90%. If a country's deficit is above 3% of GDP, it should be reduced during periods of growth to reach 1.5% and create a spending buffer for periods of difficult economic conditions. The new rules contain various provisions to allow more room for maneuver. Specifically, they allow three additional years beyond the standard four to achieve the goals of a national plan. MEPs have ensured that this additional time can be granted for any reason the Council deems appropriate, rather than only under specific criteria, as initially proposed. At the request of MEPs, countries with an excessive deficit or excessive debt can request a discussion with the Commission before providing guidance on the spending path. A Member State may request the submission of a revised national plan if there are objective circumstances that prevent its implementation, for example a change of government. The role of national independent budgetary institutions – charged with verifying the adequacy of their government's budgets and budgetary projections – was consolidated by MPs with the aim of helping to further strengthen national plans.

All countries will have to present medium-term plans that set out their spending targets and how investments and reforms will be undertaken. Member States with high levels of deficit or debt will receive guidance on spending targets. To ensure sustainable spending, the reform introduces numerical reference guarantees for countries with excessive debt or an excessive deficit. The rules also add a new orientation, namely the promotion of public investments in priority sectors. Ultimately, the system will be more tailored to each country on a case-by-case basis rather than applying a one-size-fits-all approach, and social concerns will be better taken into account. The Council must now give its formal approval to the measures. Once adopted, they will enter into force 20 days after publication in the Official Journal of the EU. Member states will have to submit their first national plans by 20 September.

The former prime minister's line is pragmatic. «It is not perfect and does not solve all the problems but it is a good compromise that will allow the EU to prepare better and face economic challenges with renewed confidence». That said, the Decisions on infringement procedures for excessive deficit will be presented on 19 June. And they will almost certainly concern eleven countries, including Italy, which – yesterday's data – presents a record deficit for 2023 at 7.4%. «The recovery plan will not be easy but with the new rules it is certainly more compatible than the old ones», highlighted Gentiloni.
In a nutshell, the economic governance reform maintains the Maastricht parameters which set the deficit thresholds at 3% of GDP and the debt at 60%. For the 5 Star Movement “it is a noose around Italian citizens”. For the European Greens “it is a straitjacket for the member states”

«Meloni negotiates the new rules of the Stability Pact in Europe and then, at the time of the vote in the EU Parliament, her party and the entire government majority abstain. It is evident that this is a denial and a resounding rejection for the prime minister and minister Giorgetti! There is an awkward and desperate attempt to distance themselves from themselves because they know that the agreement they signed is penalizing Italy due to their inability to negotiate and their lack of credibility.. The Democratic Party consistently chose to abstain because, despite being interested in avoiding the reinstatement of the old rules, the final text of the Pact represents a step backwards compared to the proposal put forward by Gentiloni which we strongly supported, and all this risks provoking restrictive policies for the our country in the coming years.” He declares it Piero De Lucaleader of the Democratic Party in the European Policies Committee of the Chamber.

Here are the pillars of the new Stability Pact which provides 4-year plans, extendable to 7, to consolidate the accounts and establishes new limits, with exemptions and transitional rules:

THE NEW STABILITY PACT. This is the set of common rules to increase the convergence of public finances in the EU. The objective remains that of bringing public deficits below 3% of gross domestic product and public debts below 60% of GDP. The old Pact was suspended at the beginning of the pandemic and was reactivated at the beginning of 2024.

THE TIME TO REPAIR THE ACCOUNTS. The recovery plans agreed by the countries will have a duration of 4 years, extendable to 7 years following reforms that improve the growth potential and sustainability of public finances. To give more time for the recovery, commitments on the Pnrr will also be considered. Recovery and national co-financing of EU funds in 2025 and 2026 will then be considered to allow exceptions to a repayment of the accounts year by year and without postponements.

TRAJECTORY AND EXPENDITURE. The Commission will communicate to the States a 'Reference Trajectory to place the debt on a sustainable downward path and calculated with the given methodology. This year it will be announced with the 'Spring Package on June 19th. On the basis of that, the States will have to present multi-annual spending plans (by 20 September), which they must strictly adhere to year by year (overshooting limits are set).

THE STANDARDS ON DEBT. The Trajectory must in any case lead to a minimum average annual decline of 1% in the public debt/GDP ratio for countries with a debt exceeding 90% of GDP, such as Italy (0.5% for those with debt between 60 and 90%).

MORE VIRTUOUS ON THE DEFICIT. A safeguard is introduced which obliges states with a deficit/GDP already within the 3% ceiling to further reduce it to 1.5%.

THE NEW PROCEDURE FOR EXCESSIVE DEFICIT. Countries that exceed 3% of the deficit will have to guarantee a structural adjustment of the accounts for at least 0.5% of GDP. The procedure is also triggered for excessive debt and if countries do not respect their commitments on spending plans (with pre-established tolerance values). June 19th will also be the date on which the deficit processes will formally open with the Commission reports. According to Eurostat, in 2023 eleven EU countries had deficits above 3%. To reinforce the procedure, sanctions of up to 0.05% of GDP are envisaged.

TOLERANCE ON REFORMS, PNRR AND DEFENSE SPENDING. The procedure will take into account progress on reforms and investments, including those of the PNRR, and the increase in defense investments.

THE COST OF INTEREST. On a transitional basis, the first 'round' of plans will take into account the increase in interest payments on debt when a state commits to a given set of reforms and investments.