The magnitude of the challenges facing Europe means that a new paradigm of economic governance is necessary, the European Commission defended yesterday in the presentation of its expected proposals to modernize the application of the stability pact, an announcement that was accompanied of a devastating analysis of its most recent legacy: less investment, more debt and low growth.
The reform aims to ensure a “realistic” and “gradual” pace of fiscal consolidation, while leaving room for member states to make investments in key sectors, such as digitization, the energy transition or strengthening social resilience. The means that Brussels proposes to achieve this (tailored adjustment plans for each country, the possibility of extensions, incentives to make reforms and investments) are in line with what the Council of Ministers of Economy of the EU (Ecofin), but they have sounded the alarm in the German Ministry of Finance, in the hands of the liberal Christian Lindner, whose pressure has led the Commission to introduce some last-minute nuances to this new approach, such as call for a minimum annual adjustment of 0.5% in countries with more than a 3% deficit.
“The stability and growth pact has been essential to establish the economic and monetary union, but its shortcomings are more than obvious, whether we look at the growth of public debt or investment levels or our growth economy in the last 20 years”, lamented the European Commissioner for Economy, Paolo Gentiloni, in a press conference yesterday. 20 years ago, before the financial crisis, the average public debt of the EU as a whole was 20%, now it exceeds 80%. “A lot has changed since we agreed our tax rules in the 1990s. We live in a very different world than 30 years ago, there are new challenges and new priorities”, remarked the vice-president of the Commission, Valdis Dombrovskis.
The proposals presented yesterday do not touch the benchmark thresholds of the pact, the famous limits of 60% for the debt and 3% for the deficit, which have never really been applied, but Brussels is considering leaving behind the approach of past, which consisted of asking for a similar level of adjustment in all countries (1/20 per year of all debt above 60%). The alternative he proposes consists of agreeing on a path of fiscal consolidation individualized by country, depending on the starting situation of each one, with more “gradual and realistic” policies than those applied now.
The multi-year adjustment plans, four years ahead, will be designed by the governments themselves and negotiated with the EC, but they will need the endorsement of Ecofin to be adopted. The reference value will become the net annual expenditure, and what will be measured each year will be the possible deviations from this objective. In addition, the adjustment period can be extended up to seven years if investments are made in key sectors, such as digitization or the energy transition. A national exception clause that, in the event of a natural disaster, for example, will allow the application of the rules to be temporarily suspended in a specific country.
But the final version of the proposal adopted yesterday puts limits on the promises of fiscal flexibility: countries with a deficit that exceeds 3%, as happens in Spain, will have to make a fiscal adjustment equivalent to 0.5% of annual GDP, the adjustment policy must allow 3% to be placed at the end of the plan and, if a country gets an extension, the debt cuts must be concentrated in the first years. It would also be required that annual net spending does not exceed the GDP growth potential expected during this period.
Despite these safeguards, this is a real paradigm shift from the current system, “the biggest reform of the EU’s economic governance rules†since the financial crisis of the last decade, in the words of the EC. which has also updated the system of sanctions. In case of deviations, excessive deficit procedures will be opened that can lead to fines, lower than now (so high, 1% of GDP, which have never been activated), but more credible (up to 0, 05% of GDP), and therefore more applicable.
