How will EU debt rules change?

27 April 20222 years ago babelfish

What does the report "The reform of EU tax rules: if not now, when?" by Intesa Sanpaolo on the Italian economic future. Giuseppe Liturri's analysis

A few hours after the widely expected confirmation of Emmanuel Macron at the helm of the Republic – instead of lingering on the indigestible molasses that oozes from the media cheering for the victory of good over evil – it is time to understand the work that is underway on the reform site. the budget rules that will be decisive for the future of our country.

To this end, we are helped by an excellent work by the Intesa Sanpaolo study and research center, entitled " The reform of EU tax rules: if not now, when?" . This is a dossier on which the current French presidency had placed great hopes, hoping to make it a key result of the semester ending in June. Then came the economic slowdown at the end of 2021, followed by the war in Ukraine and it is now highly probable that the construction site will remain open for at least the next 12 months. With the hope of applying the new rules from 2024, while the safeguard clause of the Stability Pact should still be in effect by 2023.

Intesa Sanpaolo economists did an interesting exercise. They reviewed the various reform proposals made in recent months by various European research centers and think tanks and identified common ground in the proposal for a rule on the growth of nominal public expenditure.

And already on this point – in highlighting the strengths and weaknesses of this new rule – the document gives us an interesting truth: so far we have been guided (it is an understatement) by rules that only had defects.

The Stability Pact, in force from 2012-2013 in its reformed version, was pro-cyclical (i.e. it imposed cuts during a recession, worsening the disease it was intended to cure), complex in application, based on unobservable numbers but only estimable (such as the output gap and the structural deficit), not very transparent and depressed investments.

Too bad that this system from 2012 to 2019 has created enormous damage to Italy, forced to trudge to asphyxiated growth rates, without anyone ever apologizing. But let's look to the future.

The new rule should provide that the growth of nominal public expenditure should be allowed in relation to three variables:

The growth rate of potential GDP
Expected inflation
The speed of debt reduction exceeding the target level, which would act as a brake.

And it is this last parameter that is the keystone of everything. Economists do not hide that the new rule " would not negate the need for a significant consolidation effort for high-debt countries" and that " the required consolidation path could be even more stringent than that implicit in the current debt rules of the Pact of Stability and Growth " . To this end, " decisive parameters and speed of adjustment " will turn out.

In fact it is true: we could get rid of many of the defects of the current rules and considering that public expenditure should be assumed net of (some) investment expenses and net of the so-called automatic stabilizers (for example, the redundancy fund), we would therefore have less pro-cyclicality.

The result of the simulation on Italian public accounts deriving from the application of this rule is interesting. Surely in the next few years we would have more fiscal space for maneuverability than we would have with the old rules. But the problem of repaying the debt is only pushed forward in time, and also re-proposed with greater harshness.

And we would end up from the frying pan on the grill, because " a too stringent limit to public consumption could be counterproductive, especially if it were to be reflected in current expenditure components such as health and education ", conclude the economists.

But even on this negotiating platform, the fear expressed by the study is that " the reaching of an agreement does not appear to be taken for granted and, in the event that the differences between countries should prove incurable, we could witness a confirmation of the existing rules that in the past have however, a certain degree of flexibility is permitted ” .

In the light of these conclusions of the study, the very prudent approach used by Mario Draghi and Daniele Franco in tracing the path of the evolution of public finance up to 2025 appears much clearer. The figures envisaged are in fact fully compliant with the indications of the Pact of Stability, as if it were not suspended at all. In fact, the rule on the growth of public expenditure is respected – which already exists and is to be reformed for the future – and the obligation to approach the medium-term objective is respected to an extent of at least 0.5% of GDP per year. 'year.

In short, there is very little to be satisfied, even if it is an appreciable advancement. As long as the public debt is the devil to be reduced towards objectives that are not anchored by reality and growth and employment will be a possible consequence, there will only be problems for Italy.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/riforma-regole-fiscali-ue-debito/ on Tue, 26 Apr 2022 05:19:03 +0000.