Last week, the Commission and the European Parliament reached an agreement on the reinstatement of the Pact for Stability and Growth, so that on September 20 this new version will definitely enter into force. This is a not insignificant revision of the previous one: less demanding than the one before covid, although more severe than the zero requirement of the last four years.
The result captures the commitment between the fiscal hawks, led by Germany (which achieved a maximum deficit of 1.5% of GDP), and the more lax countries, led by France, with an emphasis on avoiding austerity. In any case, there is consensus that it will affect Germany very little and have more impact on France and Italy. It will have to be seen.
The new rules seek clarity, flexibility, investment stimulus, adaptation to national specificities and, in particular, articulation around a single parameter, which happens to be annual public expenditure. This defense is defined in terms of the primary deficit, i.e. the observable discounting the extraordinary income or interest expenses of the debt, those financed with EU resources and those due for unemployment benefit above the ‘usual.
Based on the interaction between governments and the Commission, Brussels will define the expenditure program for each country ( net expenditure path ) for four-year cycles, extendable to seven in some circumstances; from here, governments will have to design their annual plans, and they should include reforms and investment (in the fight against climate change, in energy transition, in energy security and in defense).
Although the debt and deficit targets have not been altered (they remain at a maximum of 60% and 3% of GDP, respectively), one of the most substantial modifications of the new pact is the design of a more acceptable reduction process, and which allows for a gradual decrease appropriate to the situation of each country. Thus, for those with public debt/GDP higher than 90% (Spain, for example), its reduction will be one percentage point/year (less severe than the annual 1/20 of the excess of a 60% of previous public debt), while for countries with public debt between 60% and 90% of GDP their effort will be smaller (0.5 points per year). For its part, the deficit will have to be reduced during the years of growth to a maximum of 1.5% of GDP.
Although there are other relevant aspects (in particular, the new role given to independent tax control bodies, such as Airef in Spain), the most substantial thing today is that the new rules are starting to work. It remains to be seen to what extent they are, like the previous ones, a catalog of good intentions or really achieve their goals. In any case, we will soon see whether or not we enter a new stage of austerity, even if it is moderate.
