After several months of informal negotiations, the European Commission proposed on 9 November a reform of the Stability and Growth Pact (SGP) to be debated. Only the broad outlines of the reform have been presented. The Commission has deliberately left the most politically sensitive details open. The reform of the fiscal rules must thus be adopted next year.
While investors’ eyes remain riveted on the timing and extent of the ECB’s monetary policy normalisation (key rates and balance sheet), it is on the fiscal policy side that tensions are most acute among Europeans.
The ‘general escape clause’ made it possible to suspend the fiscal rules of the SGP during the Covid-19 crisis. With the war in Ukraine, this safeguard clause was extended until 2024, allowing European states to implement stabilisation measures without any institutional constraints.
At the same time, a consensus emerged that the rules of the SGP needed to be reviewed. Many proposals were on the table. After several months of informal negotiations, the European Commission proposed on 9 November a reform of the SGP to be debated. The Commission calls for “a simpler and integrated architecture for macro-fiscal surveillance to ensure debt sustainability and promote sustainable and inclusive growth”.
Only the broad outlines of the reform have been presented. The two fundamental pillars of the pact have been maintained (a public deficit limited to 3% of GDP and a debt-to-GDP ratio below 60%). However, these numerical targets are no longer binding: the focus has shifted to the medium-term adjustment and the ‘one-size-fits-all’ approach is de facto abandoned. The aim is to avoid pro-cyclical fiscal policies, which is good news.
In practice, it would be up to each country to define its own debt and deficit reduction path, instead of the current uniform rules. The idea is to empower member-states. The Commission would present each member-state with a debt adjustment path over a period of four years, with an additional three years warranted to countries whose public debt exceeds 60% of GDP, provided that they commit to structural reforms and strategic growth-enhancing investments.
The new framework should address current challenges and help make Europe more resilient by reducing public debt ratios in a realistic way without sacrificing strategic investment spending. The Commission proposes to play a greater role in assessing national budgetary plans. Two difficulties arise here: firstly, this process presupposes calm negotiations between each state and the Commission. What will happen in the event of disagreement? The second difficulty, linked to the first, lies in the typology that will be adopted. Which criteria will be used to dif ferentiate among countries? The Commission has deliberately left the most politically sensitive details open. The problem posed is anything but new: how can northern countries be reassured about debt sustainability if indebted countries are given too much leeway to avoid pro-cyclical policies or the sacrifice of necessary spending.
Divisions remain deep in the Eurozone concerning this reform. The four-to-seven-year adjustment period for countries that ‘break’ the rules to put their debt on a permanent downward trajectory is considered too lax by the Germans. Germany has proposed that an independent budgetary watchdog should replace the Commission to analyse debt sustainability independently and make recommendations. This proposal has little chance of being accepted by other member-states.