In this election year, the European Parliament’s voting schedule is attracting more attention than usual, particularly the vote on reforming the Stability and Growth Pact, the European Union’s budgetary arm.
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The principle behind the budgetary rules remains unchanged: to coordinate and strengthen the budgetary policy of Member States. The latest reform proposal from the Economic and Financial Affairs Council (ECOFIN) is full of promise, but in detail it lacks a little ambition. The rules still have two components: a preventive and a corrective one.
The corrective arm has often been criticized for being procyclical. Usually, the efforts required of countries in difficulty penalize their growth and therefore exacerbate their difficulties. In the new plan, the required budgetary adjustment is four years and can be extended to seven years in the case of reforms that promote potential growth. Furthermore, the credibility of the rules is highly contested because economic sanctions have never been applied. The new rules lower the amount of sanctions from 0.2% of GDP to 0.05% of GDP (cumulative every six months) and make them de facto easier to implement.
Until now, the preventive arm has been based on two pillars: the trajectory of the structural budget balance and the growth of net primary expenditure excluding interest, cyclical expenditure, and EU-financed expenditure. The new rules place greater emphasis on the second pillar, which is an observable measure, unlike the structural balance, which is based on a highly uncertain estimate of potential growth. Furthermore, analyzing the trend in net expenditure is particularly relevant given that when the growth in this expenditure is equal to or lower than potential growth, the budget deficit stabilizes in the medium term. This measure can therefore have a significant impact on the dynamics of public debt in the eurozone. However, since 2011, this criterion has been met on average 52% of the time in the eurozone. For France and Italy, this ratio falls to only 25%, dampening any optimism about the new rules.
Finally, the most eagerly awaited change concerns the treatment of excessive debt (above the 60% of GDP threshold). Under the old rules, governments had to reduce the gap between their debt level and the recommended level of 60% of GDP by 5%. Unsurprisingly, France, Italy and Spain have never complied with this rule since 2011. Today, the proposal is simple, but it introduces a new threshold of 90% in addition to the 60% threshold. This new threshold clearly confirms the significant increase in post-pandemic debt. For countries with debt levels between these two thresholds, the required effort is 0.5 percentage points of GDP, and for countries with debt levels above 90% of GDP, the effort is only 1 percentage point of GDP. This means that France and Italy, which under the old rules had to reduce their debt by 2.6 and 4 points of GDP per year respectively, will now have a much more achievable target.
In conclusion, the new rules advocate more bilateral exchanges between the European Commission and governments, while strengthening the Commission’s control throughthe European Fiscal Board. However, they lack a certain amount of ambition in terms of their effective application. For example, monitoring of national plans by independent national budgetary institutions would have ensured better compliance with the rules. Thus, although this reform is a step in the right direction from a budgetary perspective, it lacks the substance needed to strengthen the implementation of budgetary rules.
