EU Stability Pact: how it will change and what will happen to Italy
The details of the agreement on the new Stability and Growth Pact and the effects for Italy
Last night, EU finance ministers reached agreement on the new Stability and Growth Pact. The last Ecofin meeting – called on an extraordinary basis and via videoconference – lasted two hours but was more than enough to seal an agreement which in fact had already been signed in the evening with the push of France and Germany and the support of 'Italy.
THE AGREEMENT IN BRIEF FOR THE NEW COVENANT
The gist of the agreement is this: the new stability pact is much more complex than the old one and responds to a series of inputs. On the one hand, rigid fiscal sustainability is maintained, as requested by Berlin; on the other hand, the aim is not to drown growth by keeping in mind investments and debt interest, in particular in a three-year transitional period, from 2025 to 2027.
HOW THE TREATY CHANGES
Let's see the numbers. The principle is still the Maastricht Treaty with the thresholds of 3% of GDP for the deficit and 60% for the debt. States not in line with these parameters must comply with recovery plans agreed with the European Commission on the model of National Recovery and Resilience Plans.
THE TRANSITIONAL CLAUSE
States with a deficit above 3% will be required to implement an annual reduction of 0.5%. At the push of Paris – with the support of Rome, according to the Agi agency – a transitional clause for 2025-2027 was approved which provides for taking into account the increase in interest on the debt in the calculation of the deficit cut. It's not a full spinoff but it's close.
HOW THE RETURN PLANS WILL WORK
Deficit reduction plans last from four to seven years (in the case of reforms and investments). The deficit cut can also be differentiated along the way (not necessarily -0.5% every year) to allow for example more investments in some years if necessary. The important thing is that at the end of the return journey the objective is achieved.
THE ROLE OF INVESTMENTS FOR DEFENSE
Investments made for defense are taken into consideration in the evaluation of the opening of a possible procedure for excessive deficit, the Agi news agency comments: "Furthermore, governments will be allowed to deviate from the net spending path of 0, 3% of GDP on an annual basis and 0.6% of GDP cumulatively during the monitoring period”.
WHAT HAPPENS TO STATES IN BETTER CONDITIONS
Even the states with the healthiest accounts (as regards the deficit) are required to reduce the debt and maintain a cushion for the deficit to avoid, in the event of a crisis, exceeding 3%. Countries with debt above 90% of GDP will have to reduce it by one percentage point per year during the adjustment period; countries with a debt between 60% and 90% will have to reduce it by 0.5%.
THE TAX BEARING
The fiscal cushion is equal to 1.5% (with the current rules technically the tolerated deficit is 0.5%). To guarantee the buffer, the annual adjustment should be equal to 0.4% of GDP (in the case of four-year recovery plans), which could be reduced to 0.25% of GDP (in the seven-year recovery plans ).
THE FIXED PARAMETER
Ansa explained: “The path to structural reduction of the deficit – i.e. that of getting below the 3% ceiling – for countries like Italy has a fixed parameter, 0.5% per year. But the speed of the correction can change: a government, this is the latest news, can ask the Commission, if it wants, to agree on a technical trajectory that does not block investments and takes into account the increase in interests, according to a very similar to the one used by the European executive with the Pnrr. Berlin, for its part, has obtained a key piece of data: the so-called safety anchor which obliges countries that have already fallen below the 3% threshold to reach 1.5% of the deficit/GDP in order to have an anti-crisis cushion . But, even in this case, for countries with debt exceeding 90% of GDP there is an exit strategy: reduce the deficit by 0.25% per year over a total of seven years instead of 0.4% over a total of 4 years".
MELONI'S COMMENT
The Prime Minister, Giorgia Meloni, considers it important that a common sense compromise has been found among the 27 EU member states for a political agreement on the new Stability and Growth Pact. This is what we read in a note from Palazzo Chigi. “Despite very different starting positions and needs between the States – he continues – the new Pact is an improvement for Italy compared to the conditions of the past”. “Less rigid and more realistic rules than those currently in force, which avoid the risk of an automatic return to the previous parameters, which would have been unsustainable for many member states. Thanks to a serious and constructive approach to negotiation, Italy has managed, not only in its own interest but in that of the entire Union, to provide gradual mechanisms for debt reduction and recovery from the high deficit levels of the Covid period", look at the note again. “Pnrr investments and the increased interest costs caused by the ECB 's interest rate hike will be taken into account and defense spending will be considered separately as relevant factors.” This is one of the points highlighted in Palazzo Chigi's note on the EU agreement on the Stability Pact. “Although the new Pact contemplates innovative mechanisms aimed at taking into account the effects of external and extraordinary events in the calculation of the numerical parameters to be respected, there remains – we read again – the regret for the lack of automatic exclusion of expenditure on strategic investments from the balance of deficit and debt to be respected. A battle – concludes the note – which Italy intends to continue to carry forward in the future”.
CROSETTO'S WORDS
“I thank the Prime Minister Giorgia Meloni and the Minister of Economy Giancarlo Giorgetti for the great result achieved in the redefinition of European rules and parameters for the coming years. As far as Defense is concerned, I am happy that the Italian position has been implemented and that defense investments have been considered a relevant factor for the exclusion from the calculation of budget objectives". Thus the Minister of Defense Guido Crosetto in a note. “In a difficult moment like this – he adds – it was right to free up resources for healthcare, social services, tax interventions and the competitiveness of companies, without giving up safety. Our teamwork and the seriousness of our positions were crowned with success."
+++
EXTRACT FROM A FACTSHEET FROM CORRIERE DELLA SERA ON THE NEW STABILITY PACT:
What does the reform involve?
It keeps the Maastricht parameters unchanged: the deficit/GDP ratio must not exceed 3% and the public debt/GDP ratio must be below 60%. But the rule that establishes that for the portion of the debt/GDP ratio in excess of the 60% level, the reduction rate must be equal to 1/20 per year, disappears. Instead, medium-term national budget-structural plans are envisaged, defined on the basis of net primary expenditure. The plan lasts 4 years but in case of reforms and investments it can be extended to 7 years. The Pnrr will also be taken into consideration. The Commission provides a technical trajectory covering the adjustment period. The automatic rule, for countries above 3% deficit, of the annual return of 0.5% of GDP has remained.
What is the technical trajectory based on?
It is risk-based and country-specific and anchored on debt sustainability. It should ensure that, by the end of the adjustment period, debt follows a plausibly downward trajectory or remains at prudent levels, even in adverse scenarios. Safeguards are foreseen when a country is outside the excessive deficit procedure: common quantitative parameters for the annual reduction of debt and deficit.
What is debt protection?
Countries with a debt/GDP ratio above 90% (Italy) will have to reduce their debt by 1% per year, countries below that threshold by 0.5% per year.
And what about the deficit?
EU countries will not be able to limit themselves to a deficit/GDP ratio of 3%, but will have to guarantee a buffer for crisis situations and go down to 1.5%. Italy, for example, moves from a medium-term objective of a primary surplus of 0.25% to a structural deficit of 1.5%.
And investments?
In evaluating the procedure for excessive deficit, the Commission will be able in 2025, 2026 and 2027 «in order not to compromise the positive effects of the Pnrr» adjust the reduction benchmark by 0.5% per year (therefore reduce it), to take into account of increased interest payments and investments for the green and digital transition and defense.
How quickly must EU states converge towards safeguarding the deficit?
The annual improvement in the structural primary balance to reach the 1.5% margin is equal to 0.4% of GDP in 4 years, reduced to 0.25% of GDP in the event of an extension to 7 years. It is more gradual than the current rules.
What is the allowable deviation from the control account?
The maximum allowed deviation from the annual net spending path is 0.3% per year and 0.6% cumulatively.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/patto-ue-stabilita-crescita-italia/ on Thu, 21 Dec 2023 05:52:46 +0000.