The European Commission has proposed a reform of the fiscal rules that govern the euro zone. The current Stability and Growth pact is suspended due to emergencies caused by the pandemic and the war in Ukraine, and there is a broad consensus on the need to reform it, preferably before it comes into force again next year. The current pact has been a dead letter too many times. It has not worked well because of its excessive complexity and its political insufficiencies.
In the technical section, the commission's proposal is to base it on an analysis of the sustainability of the debt in the medium term, similar to that carried out by the IMF in its loans. As regards political feasibility, what is sought is for the countries in the process of fiscal consolidation to endorse the adjustment plans, in a framework of dialogue and negotiation with the European Commission. The pressure from the so-called frugal countries has made it necessary to maintain concrete and verifiable fiscal adjustment paths, even if they extend over time.
The pact will now be discussed in Parliament and the Council and it remains to be seen what the final wording is. My reading of the commission's proposal, however, is that saddlebags were probably not necessary for this trip. The new pact suffers from the same defects as the previous one and, therefore, it is far from being the budgetary instrument that the euro zone urgently requires. With this pact we will continue to have an incomplete and fragile monetary union.
The technical details of the pact mean that, in practice, the rules have a wide margin of interpretation. They continue to be based on theoretical variables, such as the evolution of the potential output of an economy, which make sense but are not observable and must be estimated. For this reason, the fiscal adjustment prescriptions derived from the pact will continue to be the subject of controversy. It will be easy for the affected countries to argue that the fiscal path prescribed by the European Commission is negative for the country's economy.
As long as the euro zone is not more politically united and has its own budget, any fiscal stability agreement between sovereign states can only be based on mutual trust between member countries. For this trust to develop, loyalty between the parties is required. Frugal countries must trust and accept long but reasonable paths of fiscal consolidation for the most indebted countries. The latter, for their part, have to fulfill their commitments, of course. But since these are far away in time, they must show their good will by beginning the adjustments at times like the present, when the economic cycle is expansive. Unfortunately, this almost never happens. Electoral pressures always postpone the reduction of the public deficit. Savings and cuts are unpopular and are left for the next legislature. And that's not how mutual trust is built.
