The EC gives a change of direction to European fiscal policy and offers tailored plans

The European Commission will propose today to the governments to give a change of direction in the way of applying the stability and growth pact, which governs the designs of the community economies, with an in-depth review that would allow offering debt reduction paths as the situation of each country with more realistic objectives.

Thomas Osborne
Thomas Osborne
08 November 2022 Tuesday 23:43
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The EC gives a change of direction to European fiscal policy and offers tailored plans

The European Commission will propose today to the governments to give a change of direction in the way of applying the stability and growth pact, which governs the designs of the community economies, with an in-depth review that would allow offering debt reduction paths as the situation of each country with more realistic objectives. There is, as always, a "counterpart" therefore to this offer of flexibility, community sources explain: in case of infraction, governments will have to render accounts in public, and also the fines for offenders will be "more realistic" than now, which which will theoretically increase the chances that they will be applied.

The bad experience with the management of the euro crisis, the lessons learned from the pandemic, when the European Union temporarily suspended the application of fiscal rules and created a recovery fund conditional on the adoption of national reforms, as well as a political debate with more nuances than a decade ago, they are the elements that define the genesis of the proposal that will see the light today.

As expected, Brussels has opted for pragmatism and has given up changing the deficit and public debt target figures (3% and 60% respectively), as it would imply a modification of the treaties that could take years to materialize. The Commission's proposal to the governments, who are the ones who will have the last word, is to reform the secondary legislation on which the stability pact is based and allow it to negotiate multi-year debt reduction paths with each country four years ahead, with the possibility to negotiate up to a three-year extension to reach the agreed objective, a formula that would replace the norm of reducing all debt above the 60% limit by one twentieth per year. Those countries in which the figure exceeds 90% will be subject to stricter control.

The idea is that, as has been done with post-pandemic reduction plans, governments are directly involved in the design of national adjustment plans, which would also include economic reforms, which theoretically should help improve compliance. This greater flexibility "should contribute to a more resilient Europe by allowing strategic investments to be made in the coming years and to reduce public debt levels in a realistic, gradual and sustainable way," states the draft document, according to the Financial Times.

In parallel, Brussels proposes a new surveillance system that includes "reputational" and economic sanctions. In the event of non-compliance, the Minister of Finance of the country in question must give explanations to the European Parliament. In 25 years of history, despite the fact that there are hundreds of non-compliances, no country has ever been fined for not complying with the stability plan. Here too, Brussels proposes changes, less maximalist sanctions than those currently envisaged (up to 0.5% of GDP) and, therefore, more likely to be applied in the form of a fine or blocking of community funds.

The EC proposals are the beginning of a negotiation that seems more urgent than a year ago, now that the economic consequences of the war in Ukraine have caused a huge mobilization of public investment in order to help cushion the impact of the rise of energy prices. Brussels once again reminded the economy ministers on Tuesday that the measures should be as specific as possible, aimed at the most vulnerable households and companies, so as not to run the risk of worsening inflation and reducing the effectiveness of the actions of the European Central Bank. to control it.