After ruling out the option of an extraordinary ministerial meeting (see EUROPE 13297/16), the Spanish Presidency of the Council of the European Union has invited the European finance ministers to a dinner devoted to the reform of the Stability and Growth Pact on Thursday 7 December, the day before a meeting of the Ecofin Council, which it hopes will be conclusive on this issue.
Since July, Spain has been testing several options or ‘landing zones’ in order to find the political balance on this reform between countries with diverging positions (see EUROPE 13289/1). It recently sent the national delegations three compromise legislative proposals on the ‘preventive’ and ‘corrective’ aspects of the Pact, as well as on the national budgetary frameworks.
According to documents dated Tuesday 5 December, a copy of which EUROPE obtained, these compromise proposals received broad support from national experts on the same day, with the result that they were not examined on Wednesday 6 December by the Member States’ ambassadors to the EU and are being passed directly to the Ecofin Council with a view to reaching a political agreement in principle on Friday.
The general structure of the Commission’s initial proposal remains the same (see EUROPE 13170/1). Member States will have to present a macro-budgetary plan of at least four years’ duration, which will include: - a trajectory detailing the net expenditure path driven by the main macroeconomic hypotheses; - for countries whose deficit exceeds 3% of GDP or whose public debt exceeds 60% of GDP, the Commission’s ‘technical trajectory’, taking account of specific national circumstances and the analysis of the debt sustainability analysis (DSA); - details of investments and reforms to meet the challenges identified in the ‘European Semester’ budgetary process.
Member States will also be able to present details and timetables for investments and reforms that would justify extending the plan for three years (i.e. a maximum total of seven years), with those provided for in the post-Covid-19 national recovery plans being eligible. In addition, a newly formed government will be able to present a new plan for a period corresponding to its electoral mandate.
It will then be up to the Commission to analyse the plausibility of the public debt reduction trajectory in the light of the macroeconomic hypotheses made by the Member States, on the basis of a methodology approved by the EU Council. For the first cycle of future EU fiscal rules, the methodology will be based in particular on that described in the 2022 DSA monitoring. A working group will be set up to explore and propose improvements to this methodology, with any changes in fine having to be approved by the Board.
It should be noted that in the event that the Pact’s general escape clause is activated, at EU level or just for one State, due to exceptional macroeconomic circumstances, the countries concerned will be authorised to deviate from their adjustment trajectory.
Negotiations between Member States – especially Germany, which is calling for strict and uniform budgetary surveillance, and France, which is advocating sufficient room for manoeuvre to stimulate investment in the future – have focused on the ‘preventive’ aspect of the Stability Pact.
Taking a step towards those countries that favour budgetary rigour, the Spanish Presidency suggests that countries with excessive public debt should reduce it, on an annual average basis, by 1% of national GDP if the debt exceeds 90% of GDP, or by 0.5% of GDP if the debt is between 60 and 90% of GDP.
The average decrease in government debt would be computed from (1) the year before the start of the ‘technical trajectory’ or the year in which the excessive deficit procedure for the country concerned is projected to be abrogated, whichever occurs last, (2) until the end of the adjustment period.
‘Resilience margin’. In addition, as announced at the November Ecofin Council meeting (see EUROPE 13289/1), the Spanish Presidency is proposing to create a ‘resilience margin’ to ensure that, under normal economic circumstances, a State’s public deficit is reduced by 1.5% of GDP compared to the maximum Maastricht threshold of 3% of GDP. The annual improvement in the structural primary balance to achieve the required margin would be set at [0.3-0.4]% of GDP, reduced to [0.2-0.25]% of GDP if the national adjustment plan is extended.
However, this safety ‘cushion’ must also provide a margin for budgetary manoeuvre to enable a State to carry out public investment and reforms, the Spanish proposal stresses.
Still in the area of prudential surveillance, the Commission will create a ‘control account’ mechanism to monitor downward/upward deviations from the set path of net budgetary expenditure, but without taking account of deviations recorded in the event of activation of the Pact’s general escape clause.
On this basis, in the ‘corrective’ part of the Pact, the European Commission will have to present a report (based on Article 126(3) TFEU) when the deviations observed in a Member State’s control account exceed: - [0.25-0.5]% of GDP annually or; - [0.5-0.75]% of GDP cumulatively over several years. This step could in fine lead to the opening of an excessive deficit procedure based on public debt, a procedure that has never been used before.
As for the financial penalties to which a Member State breaching the future European fiscal rules would be exposed, these will have above all a reputational impact. Any fines imposed will not exceed 0.05% of national GDP in the year preceding a decision by the EU Council to sanction the offending country. These fines will be paid every six months until the EU Council assesses that the State concerned has taken effective corrective measures. (Original version in French by Mathieu Bion)