The European Union loosens fiscal rules in a new offensive to reduce the deficit

The euro was born with fiscal rules so harsh that they have never been applied. The gossips in Brussels say that the so-called Stability and Growth Pact generated neither one nor the other, because it was a one-size-fits-all straitjacket, whether its debt was 70% or 140% of GDP , whether his red tax was 4% or 10%.

It has never worked and when they were violated and fines had to be imposed, they were so politically toxic and economically so counterproductive that they were forgotten. When the pandemic arrived, The European Commission has put those tax rules in a drawer because its goals were too ambitious, its operation too complex, and its application subject to political decisions.

The Pact has failed to achieve its main objectives: it has not prevented debt from growing well above 60% in many countries, it did not promote economic growth or investment to increase the growth potential of economies and has caused a lag in investments compared to China and the United States which the European economy continues to pay for. These rules required governments to reduce every year one twentieth of the debt that exceeded 60% of GDP.

If it were applied now as it is and we were forced to reduce every year one twentieth of the debt that exceeds 60% of the gross product of Spain and France, they would have to make an annual adjustment of 2.6 points of GDP. Portugal more than 3%, Italy almost 4% and Greece 5.5%. With the reform it will be a point.

Last April the European Commission did so a reform proposal that increased flexibility, took into account the situation of each country and tried to make the reduction of fiscal redundancies credible and possible. The Spanish presidency of the Council of the EU started working on this proposal in July. Nobody expected an agreement to be reached in six months and everyone already expected the previous useless rules to be returned in 2024.

But this Wednesday the Spanish Minister of Economy, Nadia Calviño (who will leave the government in weeks to take over the presidency of the European Investment Bank), managed to conclude a 27-party pact.

The new rules

The reform will require governments to maintain a fiscal path that brings public debt below 60% of GDP and public deficit below 3%, but each country will do so on the basis of bilateral agreements with the European Commission That They will take into account not only adjustments but also structural reforms.

These plans will last four to seven years and include reforms related to fiscal goals. And, unlike previous rules, they will be countercyclical. In exchange for loosening the straitjacket provided for by the original Stability Pact and for the prescription for each patient and not distributing the same dose of paracetamol to everyone, without fever, at 38 or 40 degrees, Brussels imposes conditions: The public deficit must be reduced by 0.4% each year until it reaches 3%.

Public debt is equal to 1 point of GDP for countries whose debt exceeds 90% of GDP and 0.5 points for those whose debt is between 90% and 60% of GDP. Below 60% the reduction is not mandatory.

The other important condition is that net government spending (excluding debt service and spending on unemployment pensions) does not grow more than the medium-term growth rate of the economy. In return, Brussels points out where they are the most necessary investments: ecological and digital transition, social rights, security and defense, health and addiction.

A reduction that seems feasible as long as the economy grows according to forecasts. The European Commission forgets the idea of ​​reducing public debt by one twentieth of more than 60% every year and only asks for an annual reduction of one point in gross product.

Germany accepts such a reform eliminates the previous drastic debt reduction and softens the deficit adjustment. Eleven out of 27 countries currently have a public deficit above 3%. Thirteen out of 27 have a public debt greater than 60%. Only nine countries (Bulgaria, Denmark, Slovakia, Estonia, Ireland, Lithuania, Luxembourg, the Netherlands and Sweden) meet both criteria.