After four years of European-style tax holidays, with the stability pact suspended to deal with the economic impact of Covid and the war in Ukraine, the time is approaching to return to budgetary discipline. The old deficit and debt ceilings of 3 and 60% respectively, as well-known as they are unrealistic, will be reactivated on January 1 but, if the calculations made last night by the Economy Ministers of the Twenty-Seven were correct, they will be applied within a new legal framework that should make it possible to clean up accounts without stifling growth and without preventing governments from investing in strategic areas such as energy transition or defense.
The rapprochement of positions between Germany and France in recent days points to an imminent end of the negotiations. The agreement is within reach, said yesterday the vice president of the Government and acting president of Ecofin, Nadia Calviño, hours before the beginning of a working dinner of the ministers of Economy of the Twenty-seven – “with no end time” scheduled. – from which the main lines of the reform should emerge. “We have already warned the ministers that it is going to be a long night,” Calviño warned. “The proposal of the Spanish presidency is in the right direction to find the necessary balance” between the need to agree on a framework that ensures sustainable paths of debt reduction and giving flexibility to governments to make investments, she assured.
Negotiations on the reform began more than two years ago. A key point in this long path was the presentation of the European Commission's proposal to “modernize” the application of the stability pact, a fiscal corset whose credibility, in its current form, is more than in question in the eyes of the markets because Not even at the peak moments of the cycle has it managed to prevent the growth of debt, especially in southern countries.
Brussels proposed developing four-year adjustment plans tailored to each country, agreed bilaterally with the respective governments with “more gradual and realistic” adjustment paths, a true revolution that put Germany on guard, which as the negotiations have progressed in The Council has hardened its stance, attracting more allies from northern Europe to its side.
After dozens of meetings at a technical and political level, the Spanish presidency of the Council yesterday put on the table a compromise proposal that compensates for the increase in flexibility of the new system (the adjustment period may be extended from four to seven years in case to carry out reforms or investments) with the obligation to carry out an annual reduction in debt equivalent to 1% of GDP for countries where it exceeds 90%, as is the case of Spain, and an adjustment of 0.5% for those where is between 60% and 90%. In addition, a minimum annual adjustment of at least 0.5% of GDP will be required for the deficit in countries where it is above 3%, for which excessive deficit procedures will be reopened.
That there are statements that point to both “too hard” and “too soft” indicate that the text is balanced, Calviño defended before the meeting, with all eyes on the Franco-German axis. “France and Germany have worked intensely over the last two months” and “as Minister Bruno Le Maire has said, our positions are 90% similar,” highlighted the German Finance Minister, Christian Lindner, who was a priori opposed to softening the treatment of countries in a situation of excessive deficit, as claimed by Paris, which asks to limit the minimum annual adjustment of this figure to 0.3%.
“There is a red line that France will not cross,” Le Maire warned in a telematic meeting with the press. “We want the incentive to invest and carry out structural reforms to be maintained at all times for all member states, regardless of their financial situation.” France, the minister summarized, wants “clear, firm and credible” but applicable, not “unrealistic” rules. This is also the position of Italy, which has managed to exclude defense investments from the calculation to compensate for the toughening of the text.
