Last week, the Commission and the European Parliament reached an agreement on the reinstatement of the Stability and Growth Pact, so that on September 20 this new version will definitively enter into force. This is no less a revision than the previous one: less demanding than the one before Covid, although more severe than the zero requirements of the last four years.
The result reflects the compromise 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 a consensus that it will affect Germany very little and will have a greater impact on France and Italy. We will have to see it.
The new rules seek clarity, flexibility, encouragement of investment, adaptation to national specificities and, in particular, articulation around a single parameter, which becomes annual public spending. This is defined in terms of the primary deficit, that is, the observable one by discounting extraordinary income or debt interest expenses, those financed with EU resources and those payable for unemployment benefits above what is usual.
Based on the government-Commission interaction, Brussels will define the spending program for each country (net expenditure path) for four-year cycles, extendable to seven in some circumstances; Based on it, governments must design their annual plans, including reforms and investment (in the fight against climate change, in energy transition, in energy security and in defense).
Although the debt and deficit objectives have not been altered (they remain at the 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, allowing a gradual decrease appropriate to the situation of each country. Thus, for those with public debt/GDP greater than 90% (Spain, for example), its reduction will be one percentage point/year (less severe than the 1/20th annual excess of 60% of previous public debt), while that for countries with public debt between 60% and 90% of GDP, their effort will be lower (0.5 points per year). For its part, the deficit must be reduced in 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 fiscal control bodies, such as Airef in Spain), the essential thing today is that the new rules are beginning to come into effect. It will be necessary to see to what extent they are, like the previous ones, a catalog of good intentions or they really achieve their objectives. In any case, we will soon see whether or not we enter a new stage of austerity, even if it is moderate.