Revising the Stability and Growth Pact: some critical issues – Stefano Micossi – Il Sole 24 Ore, Nov. 17

The following is a translation of an article that appeared in Il Sole 24 Ore under the title "Nuovo Patto di stabilità a rischio d'ingerenze nelle politiche nazionali".

After many announcements, the European Commission managed to publish its proposal for the revision of the Stability and Growth Pact (SGP). The proposal is articulated and incorporates many elements of the debate that has taken place on the subject in recent years. However, the road to its approval appears to be uphill. One wonders whether, in an economic landscape complicated by a war on the EU’s borders, the energy crisis and a difficult monetary adjustment to beat inflation, this issue will find the space it deserves for discussion in the European Council. On the other hand, we know that the suspension of the Pact will expire at the end of next year and that a return to the full application of the 20th rule for the reduction of public debt is being insistently requested by some member countries.

The content of the proposal can be summarized in three parts. First, the Commission wants to establish a legal and operational "framework" that restores credibility and transparency to the SGP through a new macro-prudential surveillance architecture for the reduction of excessive sovereign debts based on debt sustainability analysis. While the thresholds set by the Treaty on the Functioning of the Union (TFEU) for the deficit (3 per cent of GDP) and the debt (60 per cent of GDP) would remain unchanged, the adjustment path would be agreed for each member state flexibly, taking its peculiarities into account, in order to guarantee the debt’s stable descent towards the target over a multi-year period. An operational rule on public expenditure (net of discretionary changes in taxation) )would guarantee its realization. More stringent reputational and financial sanctions would hit countries that deviate from the agreed path.

Each member country with excessive debt (i.e. above the 60 per cent threshold) should draw up and submit to the Commission a debt reduction plan consistent with the above "framework" and based, in addition to containing public expenditure, on a set of investments and reforms capable of putting the country back on a credible path of debt reduction. This adjustment would take place over a period of four years, which could be extended for another three with a further strengthening of the reform and investment measures. The plan would be discussed with the Commission and, after the necessary adjustments, it would be approved by the Council (ECOFIN). Evident here is the Commission's attempt to set up a binding surveillance procedure similar to that of the National Recovery and Resilience Programs under Next Generation EU.

The third part of the new procedure would consist of an integration of the debt reduction plans with the analysis of the specific already existing procedure for the identification and correction of excessive economic imbalances (Macro Economic Imbalances Procedure, MIP). Through dialogue with the Commission, each country could identify the structural economic aspects to be corrected in order to ensure the removal of imbalances and keep the country on a path of sustained growth.

Besides the various technical aspects to be specified - primarily the debt sustainability assessment procedure, for which there are no reliable technologies, despite economists’ commendable efforts - two aspects of the procedure stand out as particularly problematic. The first is maintaining the 60-per cent threshold as a benchmark for the long-term paths to reduce sovereign debt. In this regard, it should be remembered that the threshold is compared to the EU’s average debt/GDP ratio of around 100 percent; seven countries have much higher values. Commissioner Gentiloni knows the problem very well: in fact, he had explicitly recommended at the time not to maintain unrealistic reference values, ​​which then require convoluted gimmicks to pretend to respect the rules. The problem is that the 60-percent benchmark would imply a systematically and intensely deflationary policy for many years for the entire European Union, and an even more pronounced one for high-debt countries – a hypothesis that is totally unthinkable and destructive. But the Germans and the Dutch opposed raising the threshold for national reasons, being almost the only ones able to respect it as it stands.

The second aspect that raises doubts is the transformation of the SGP, a procedure which was supposed to protect the European Union from exceptionally deviant behavior by some member states, into a centralized economic governance procedure that would place unprecedented powers of controlling national economic policy in the hands of the Commission. As I mentioned above, the model is that of the Next Generation EU procedures. In that case, however, the member countries agreed to have their hands tied in exchange for substantial disbursements of funds from the EU. Here, on the other hand, the indebted countries – that is, almost all, given the 60-per cent threshold – are asked for a new general arrangement of economic policy in Europe. It seems to me that the sense of limit has been lost here.