Suspended in March 2020, at the beginning of the covid, when it was evident that its strict limits, never really respected, were going to be unattainable, the stability and growth pact of the European Union will come into force again on January 1 but Thanks to the agreement reached yesterday by the Economy Ministers of the Twenty-Seven, the return to fiscal discipline should be less painful than expected.
“The agreement on fiscal rules is important and positive news. It will give certainty to the financial markets and will reinforce confidence in the European economies,” celebrated yesterday afternoon the vice president of the Government and acting president of Ecofin, Nadia Calviño, at the end of the videoconference with which the Twenty-Seven concluded months of technical and at the highest political level. It has been a “very complex” balancing act but “the new rules recognize the post-pandemic reality and draw lessons from the great financial crisis,” she said.
Ten days from its end, the Spanish presidency of the Council of the EU sees one of its greatest objectives achieved, the reform of the fiscal rules that will be applied to reduce the mountains of debt left by the pandemic in the Twenty-seven. “The agreement guarantees a sustained and gradual reduction of the deficit and debt ratios,” while “protecting public investments in priority areas,” such as the energy transition, said Calviño, while his German colleague, Christian Lindner, put the emphasis on reinforcing “the culture of stability” and the clarity of the new figures.
The text agreed by the Twenty-Seven must now be negotiated with the European Parliament, which calls for a more social approach to European fiscal policy, but no major changes are expected. The Vice President of Economic Affairs of the European Commission, Valdis Dombrovskis, announced that his recommendations to governments next spring regarding the 2025 budgets will already be based on the new rules. For now, Brussels will reopen procedures for excessive deficit in 2024 and Spain, which will close this year with a deficit of 3.8% according to the Bank of Spain, is among the candidates, with France and Italy, among others.
As proposed by the Commission, the adjustment plans will be tailored to each country, through agreements with the governments that must execute them. They will be made four years in advance but with the possibility of extending the adjustment period up to seven years – or considering non-linear adjustment paths – in case of making certain investments. Determined to simplify the pact, Brussels proposed that the only operational indicator be net public spending, a change included in the final agreement.
From the first moment, this approach displeased Berlin, which during the negotiation in the Council demanded and managed to include “numerical benchmarks” to guarantee minimum reductions in the deficit and debt. For countries like Spain with a public debt greater than 90% of GDP, this will translate into the obligation to reduce it by at least 1% of GDP per year (0.5% if the debt is between 60 and 90%). Berlin has even managed to request annual deficit adjustments of 0.5% from countries where it is less than 3%, to keep it at 1.5% and thus have a cushion with which to respond to possible shocks.
Given the number of padlocks placed by Germany on the new regulations and the layers of complexity added to the process to the dismay of the European Commission, in the final stretch of the negotiation France and Italy demanded a transition period until 2027, during which the payment of interest on the debt is taken into account in the calculation of the deficit, in view of the level at which they are; Thus, the reduction of the primary deficit may range between 0.25% and 0.4%.
The Twenty-Seven were very close to the agreement two weeks ago but the resistance in Berlin forced the Spanish presidency to call one more meeting. That it was going to be held by videoconference was interpreted as a sign that the agreement was imminent. Tuesday’s dinner in Paris between the French Minister of Economy, Bruno Le Maire, and his German counterpart allowed this issue to be cleared up. The protests in Rome injected new doses of suspense into the negotiations but in the end there were no surprises. “Historic agreement, for the first time in 30 years the stability pact recognizes the importance of investments and structural reforms,” Le Maire tweeted yesterday.
