Stability Pact, the EU in search of a difficult balance

The Stability and Growth Pact, one of the pillars of EU fiscal policy, was temporarily suspended due to the COVID-19 pandemic and this suspension was extended due to the high energy effect of the Russian invasion against Ukraine. Previous rules on debt and deficits are expected to apply again from 2024, but the European Commission recently proposed a reform to give EU states more flexibility in reducing debt and deficits.

"We ensure both equal treatment and the assessment of country-specific situations at the same time," European Economy Commissioner Paolo Gentiloni told a news conference at the end of April.

Under current EU spending rules, member states' government deficits must not exceed 3% of GDP and debt should remain below 60% of GDP. Under these rules, states must repay 5% per annum of debt that exceeds the 60% limit. Rules that have a negative impact on growth for heavily indebted countries.

The current reform proposal maintains the previous objective of debt limitation, but provides for specific debt repayment plans specific to each country. Positions on debt rules and new proposals are very different in individual EU states. The "frugal" front, which brings together the countries of northern Europe, led by Germany, opts for greater fiscal rigour, while the southern states, such as Italy, complain of a limitation of their investment capacity. The debts of EU member states have soared over the past 15 years. The EU aims to conclude a deal by the end of this year.

Berlin calls for binding targets

Germany, a staunch supporter of fiscal discipline, fears the reform will overly loosen EU fiscal constraints and undermine fairness within the bloc. German Finance Minister Christian Lindner criticised the changes made by the Commission.

"Germany cannot accept proposals that amount to a weakening of the Stability and Growth Pact," he said, adding that "significant adjustments" were needed. Lindner's objections resemble a "recipe from the past," said an official in the EU executive.

"We live in a very different world than we did 30 years ago. Different challenges, different priorities," said Commission Vice-President Valdis Dombrovskis. "The new rules should reflect these changes," he added.

France and Germany disagree

The Commission seemed to want to accommodate Germany, with a safeguard clause that imposes a deficit reduction of 0.5% per year if it exceeds 3% of GDP. A request that met with opposition from France, whose debt is equal to about 110% of GDP. "Some points go against the spirit of reform. We are opposed to uniform automatic rules for deficit and debt reduction," said French Finance Minister Bruno Le Maire. Among the compromises proposed by the Commission is a "general safeguard clause" in the event of a major economic crisis.

A majority of states support the country-specific approach

Belgian Finance Minister Vincent Van Peteghem said he warmly welcomed the proposal, in particular the country-specific approach provided for in the rules. Reducing debt by focusing on investment and reform is essential, he explained. The Belgian government's goal is to cut the deficit to 2.9% by 2026, with a reduction of 0.8% per year between 2024 and 2026.

Dutch Finance Minister Sigrid Kaag said her country was "quite enamored" with the plans, but stressed the importance of "credible debt reduction" and supervision. "The devil is always in the details," he added.

Spanish Deputy Prime Minister Nadia Calviño, responsible for economic affairs, said she would do "everything possible" to approve the new fiscal rules within the year. In particular, Madrid, which will take over the EU presidency in the second half of 2023, welcomed the specific approach formulated in the Commission's proposal. Brussels and Madrid, however, differ on Spain's deficit forecasts. The Spanish government has calculated that it will reduce its deficit to 3% in 2024, while the Commission has estimated an increase in Spain's deficit of 3.3% in 2024.

From Rome, Economy Minister Giancarlo Giorgetti hailed the Commission's legislative reform proposal as "a step forward" that will allow us not to return to the old Pact. Giorgetti, however, did not hide his disappointment at the lack of the 'golden rule', that is, to deduct strategic investments from the accounts. "We had strongly requested the exclusion of investment expenses, including those typical of the digital PNR and green deal, from the calculation of the target expenses on which compliance with the parameters is measured. We take note that this is not the case." The adjustment of the Italian accounts on the basis of some technical simulations circulated in Brussels could lead to a reduction of the structural deficit of 0.85% per year in the case of a 4-year plan and by 0.45% on average if a 7-year plan. Italy, the only Eurozone country not to have ratified the European Stability Mechanism (ESM), aims to link the negotiations on the Stability and Growth Pact to the ratification of the ESM. In recent days, however, the Brussels highland has arrived. "If you start connecting everything with everything, it becomes harder to make progress," Dombrovskis warned.

Romanian Finance Minister Adrian Câciu said the package should strike a balance between "sustainability (sound public finances) and inclusive and sustainable economic growth (reform and investment needs)", adding that the new framework should create sufficient conditions to stimulate investment in member states with economic difficulties or limited fiscal space.

In 2022, Italy's debt stood at 144.4% of GDP, while Belgium's expected debt will be 106% by the end of this year, well above the limits set in the Stability and Growth Pact.

Slovenia and Croatia: stricter methodology for smaller states?

Slovenia is concerned that it is difficult to find a common methodology for measuring debt levels, due to the huge differences between Member States. "The Commission's basic proposal is not particularly to our liking on this point," said Finance Minister Klemen Boštjančič. However, the country supports the proposal's approach of focusing on monitoring debt developments rather than structural deficits.

On the same wavelength, the Croatian Finance Minister, Marko Primorac, who, although satisfied with the new rules, called the proposed sustainability analysis model unacceptable, which would include Zagreb among the high-risk countries. "We also find the current system absolutely acceptable. We do not violate existing rules, but we fully support any improvement to increase transparency and simplicity in the application of the methodology," said Primorac. The analysis of debt sustainability, he continued, is "a very complex model based on a series of assumptions that, once incorporated into the model, classify Croatia as a high-risk state." There is no reason, he added, to include Croatia among the high-risk countries in terms of public debt sustainability, given the country's excellent fiscal performance.

Bulgaria works to join the eurozone

Bulgaria aims to join the eurozone by 2025 and stay below the 3% deficit threshold. In 2022, debt amounted to 22.9% of GDP, according to preliminary data published by the National Institute of Statistics. Nikolay Vassilev, former deputy prime minister, said that to achieve a lower deficit, the expenditure items of the draft budget need to be changed.

ECB and IMF

The European Central Bank (ECB) and the International Monetary Fund (IMF) welcomed the EU's proposals to revise its fiscal rules to boost growth, but the IMF called for further action.

The ECB appreciated "the efforts of the European Commission to find a compromise with the states", said the President of the Eurotower Christine Lagarde, explaining "it is clear that there are differences between countries because we face different challenges".

Next steps

The EU could reform the pact by the end of the year. No one wants to go back to the old governance and no one wants to give markets a message of uncertainty about EU rules. A first formal round table on the pact is planned at the Ecofin meeting in mid-June.

This article has been produced with contributions from AFP, AGERPRES, ANSA, Belga, BTA, dpa, EFE, STA, HINA within the framework of the European Newsroom project.