The decline in debt and deficit. Here is the EU proposal on the new Stability Pact


By John

The contours of the reform of the Stability and Growth Pact, the set of budgetary rules of European states for membership of the Economic and Monetary Union, are increasingly defined. The heart lies in the 4-year spending plans (extendable to 7 years), which will be agreed by the States with the European Commission on the basis of a trajectory traced by the community executive to bring public debt under control. In essence, EU countries will spend public funds as they see fit, but within given trajectories. However, the grounding of the new rules was gradually enriched with stakes: “safeguards”, the Germans called them. The objective was to reassure them of a credible reduction in the public debt and deficits of the less virtuous countries, which ended beyond all thresholds after the pandemic, the war in Ukraine and the repercussions on energy and inflation.

Thus, in the spending plans of the States the debt will have to fall by 1% per year for those who have a debt over 90% of the GDP and by 0.5% per year for those who have a debt over 60% of the GDP (the fixed ceiling of the Maastricht Treaty) but below 90%. On the deficit, a reduction is also requested for the countries already within the 3% threshold envisaged by the treaties: so that it drops to 2% for the least indebted (but above 60% of GDP) and to 1.5% for the countries with high debt (over 90%). The latest turning point in the game was the attempt to reopen the automatic procedure for excessive deficit, which provides for an adjustment of the accounts (structural, i.e. net of cyclical components and non-recurring interventions) equal to 0.5% of GDP for those exceeds the deficit of 3% of GDP. The countries with high deficits have tried to ensure that there is talk of “primary” adjustment, that is, without even taking into account the interest on the debt, a sensitive issue for all countries that, like Italy, are dealing with a significant burden. The frugal refused.

Having gone out the door, the “primary” adjustment has returned through the window but only as a limited exception: the Commission in evaluating the deficit procedure, according to the new Spanish compromise, will take into account the increase in interest on the debt between 2025 and 2027 for «do not compromise the positive effect of the Pnrr». A general Franco-German agreement was found on this point, which was then extended to Italy and the Spanish presidency which translated it into working hypotheses. An agreement is not a given, with seven states apparently against it, but it is not impossible. To protect investments, there is the possibility of considering the commitments made for the Pnrr to have the spending plans extended from 4 to 7 years, provided that it contains significant reforms and investments to improve sustainability and growth.