One of the issues on the agenda at the European Council on 10 March concerns the revision of the budgetary rules. That is, that set of rules that limit the deficit and debt (in relation to GDP) of the euro economies. During the pandemic, they were suspended. Countries were able to spend without constraints. Getting into debt. For example, between 2019 and 2020 our public debt increased by over twenty percentage points; the Spanish one of over twenty-three. The Italian political forces, none excluded, are pressing for change. Radical. The rules in force just don’t like them: they are considered complicated, not very transparent, even harmful.
To understand if and how to review them it is necessary to clarify one point. In a monetary union (such as the European one) that is not a fiscal union, the choices of a single member can have an impact – even very negative – on others. Some form of coordination is needed. What does it mean? Each state decides how to distribute its expenses and taxes. However, these choices must be consistent with the legal framework defined at European level. The current one is the result of several reforms that have taken place over the last thirty years. In 1992, the Maastricht Treaty set the famous criteria of 3% for the deficit and 60% for the debt. They are not, therefore, a mere invention, as the Eurosceptics say. In 1997, the Stability and Growth Pact (PSC) was launched, introducing the criterion of balanced budget: the deficit must not only be less than 3% but must also tend to zero in the medium term.
The Pact was reformed for the first time in 2005. Following the “tear” of the Germans. At the time, Germany was “the sick man of Europe”: GDP contracted by 0.7%, the deficit exceeded 3.7% and the unemployment rate by 10. According to Chancellor, Gerhard Schröder, a restrictive fiscal policy – as strongly requested by the then President of the European Commission Romano Prodi – would have worsened the situation. This position is supported by Ecofin (the Council of European financial ministers) whose current presidency belongs to Italy with Giulio Tremonti. In this clash between institutions, which has never happened before, it is Ecofin that prevails: the rules, moreover, provide ample room for maneuver in the event of an economic slowdown. And, thus, Germany gets more time to meet budget targets. Consequently, the rules are softened. The possibility of separating outgoings and incomes linked to the economic cycle is inserted. In this way, expenses such as – for example – the higher unemployment benefits that a government has to pay in a recession, can be financed in debt without violating the Maastricht parameters.
The second reform of the Stability and Growth Pact also comes as a result of a crisis, this time much wider. The financial one of 2011. The Greek affair, the result of public finances not in order, is affecting the entire area. The survival of the euro is at risk. The European Central Bank (ECB) has started buying debt from troubled states such as Italy and Spain (with the Security Market Program). Shortly thereafter, president Mario Draghi pronounces the famous “Whatever it takes”. Monetary policy becomes more and more expansionary. On the fiscal side, a strong, more rigorous signal must be given. The rules are, once again, revised. More restrictively. The Six Pack (package of six regulations) and the Fiscal Compact (the intergovernmental agreement that entered into force in January 2013) establish the annual corrections to be made to the deficit net of the economic cycle (half a percentage point) and to the debt / debt ratio. GDP (one twentieth of the surplus with the parameter of 60%). These new rules are considered by many to be excessively strict.
In reality this is not the case. An in-depth analysis of the regulations shows that debt can be spent on investments and reforms, as well as in the event of “bad times” or “extraordinary events”. Furthermore, in its assessment, the Commission takes into account various factors such as, for example, the overall macroeconomic framework, the debt structure, the level of private sector indebtedness, the long-term sustainability of social security systems. A regulatory framework that is anything but rigid. And it is Mario Draghi himself who admits it in an interview with El Pais in November 2016: “The rules have all the flexibility you need”.
To explain how to make the most of the room for maneuver, the Commission published guidelines in January 2015. No revision of the rules, mind you. Just a simple clarification. Yet, from that moment on, the attitude of Brussels changed radically. It becomes soft. It is sufficient to analyze the different editions of the Economic and Finance Documents (Def) to realize this. In 2014, the then Renzi government asked to be able to increase debt to finance a series of reforms: public administration, justice, labor market, taxation, competition. The request, however, is not accepted: the government must, therefore, cut the structural deficit by about 0.3 percent. Only a year later, in the face of similar requests, did the Commission change its position.
And, it decides to grant flexibility not only for reforms but also for expenses related to new investments and for those deriving from the exceptional arrival of migrants. In the two-year period 2016-2017, Italy obtains approximately 22 billion in higher debt which will be excluded from the calculation of the rules. Reforms are only (to a small extent) implemented, as are investments. But that’s another story. What is interesting to highlight here are the different ways in which the Commission has interpreted the application of the Pact. First he called for drastic cuts. Then, starting from 2015 it has granted flexibility despite the rules being always the same.
It would be useful to understand, at this point, whether the Commission is willing to find room for flexibility within the current regulatory framework to meet the needs of European economies after the pandemic. The experience of recent years suggests that margins exist. And how. However, they should be exploited. The alternative is to embark on a discussion that promises to be very complex from a political point of view. And, above all, it risks ending with far more rigid, inexplicable and penalizing rules for the Italy of the past.