The European finance ministers approved their negotiating position on the reform of the Stability and Growth Pact on Wednesday 20 December at the end of a two-hour remote meeting (see EUROPE 13308/1).
This is “very good news for Europe” which concludes a successful Spanish Presidency of the Council of the European Union: the Ecofin Council has reached an agreement on a reform of the fiscal rules that is “balanced, realistic and adapted to the current and future challenges” of the Member States, said the Spanish minister, Nadia Calviño, from Madrid. These rules will be easier to apply thanks to the introduction of “a single indicator”, namely the limit for net spending level (‘net expenditure rule’). And they will guarantee “fiscal responsibility” through a “gradual, credible and nationally appropriate” consolidation of public finances, while protecting investment and structural reforms, she added, convinced that this is the “best possible agreement”.
For the European Commissioner for Economy, Paolo Gentiloni, the negotiations in the EU Council have certainly “added some complexity” compared to the initial proposal of April (see EUROPE 13170/1). Nevertheless, he said, “the core elements” have been preserved: - a move towards more medium-term fiscal planning; - greater ownership by Member States of the fiscal plans; - the possibility to pursue a more gradual fiscal adjustment to reflect commitments to investments and reforms.
On Friday 8 December, the Ecofin Council had succeeded in narrowing down the outstanding issues in the reform of the Stability Pact (see EUROPE 13310/2). Since then, work at technical and political level has further reduced the number of outstanding issues. So much so that on Tuesday evening, following a meeting in Paris, the French minister, Bruno Le Maire, and the German minister, Christian Lindner, announced their support for a Franco-German solution designed to facilitate an agreement by the EU27 on Wednesday.
Right up to the last minute, negotiations focused on: - the level of ambition of public finance adjustment trajectories by acting on several common numerical safeguards; - measures to facilitate investment and reform.
For France, the objective has been to ensure that these numerical safeguards do not weaken the Stability and Growth Pact, where the debt sustainability analysis (DSA) will play “a key role”, as a French diplomatic source indicated on Wednesday morning.
As a reminder, each Member State will have to present a macro-budgetary plan of at least 4 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 path’, taking account of specific national circumstances and the DSA analysis; - details of investments and reforms to meet the challenges identified in the ‘European Semester’ budgetary procedure, the scale of which could make it possible to extend the duration of the macro-budgetary plan to 7 years.
On Wednesday, the ministers approved the latest version of the compromise proposal that had been submitted to them, without modifying any of the final numerical safeguards included. “During the meeting, eight points were discussed”, including several numerical safeguards, which form “a package to be assessed in its entirety”, noted Ms Calviño.
‘Preventive’ arm. The ministers thus validated two numerical safeguards linked to fiscal surveillance when Member States have a deficit below the threshold of 3% of national GDP.
Since the beginning of December, they had already agreed to create a resilience margin to ensure that a State’s public deficit is reduced to a level sufficiently below 3% of GDP. Countries whose public debt exceeds 90% of GDP will have to reduce their deficit to 1.5% of GDP, while those with an excessive debt of between 60% and 90% of GDP will have to bring their deficit below 2% of GDP.
The idea is to allow Member States to react in the event of a macroeconomic shock without their deficit exceeding 3% of GDP again, according to a European source.
On Wednesday, the ministers approved the Spanish Presidency’s proposal to increase the annual rate of improvement in the structural primary balance in order to achieve the required safety margin, setting it at 0.4% of GDP or 0.25% if the national adjustment plan is extended (compared to 0.3% and 0.2% respectively in the previous compromise proposal).
Compared with existing rules, there will be no debt burden to reach a less restrictive target, according to this French source.
In addition, the safeguard for reducing excessive public debt remains unchanged. The countries concerned will have to reduce this debt, on an annual average basis, by 1% of national GDP when the debt exceeds 90% of GDP or by 0.5% of GDP if the debt is between 60 and 90% of GDP.
For countries whose deficit exceeds 3% of GDP, this rule will begin in the year in which the excessive deficit procedure (EDP) concerning them is abrogated.
‘Corrective’ arm. On the ‘corrective’ arm of the Pact, the Member States had agreed not to modify the EDP, under which a State is placed when its public deficit exceeds the Maastricht threshold of 3% of GDP. The trajectory for reducing the excessive deficit will therefore continue to be 0.5% of GDP per year in structural terms.
However, at the request of countries such as France and Italy, which are likely to find themselves in the EDP from June 2024, temporary flexibility has been introduced for the period 2025-2027 to take account of the increased costs of servicing public debt. It will be up to the European Commission to assess the impact of the rise in interest rates and to take this into account when setting the adjustment trajectory.
This provision had been agreed before the ministerial meeting. However, it will only appear in a recital added to the agreed text, whereas in early December the Spanish compromise proposal had included this flexibility in the legislative text.
Still on the subject of the ‘corrective’ arm, another numerical safeguard agreed on Wednesday concerned the control account mechanism that will be used to monitor downward/upward deviations from the set trajectory for net fiscal expenditure.
The 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 0.3% of GDP annually or 0.6% of GDP cumulatively over several years (compared with 0.5% and 0.75% respectively in the previous compromise proposal). This stage could ultimately lead to the opening of an excessive deficit procedure based on public debt.
At the end of each macro-budgetary plan, the balance of the control account will be reset to zero. This is another innovation that was decided on Wednesday before the start of the ministerial meeting, according to this European source.
One of the unknowns at the start of the Ecofin Council was the position of Italy, which France and Germany had consulted ahead of their announcement on Tuesday evening. Among the provisions that seem to have convinced the Italian minister, Giancarlo Giorgetti, to sign up to the compromise texts presented is the inclusion of both the interest burden on the debt (‘corrective’ arm) and the investment and reform efforts included in the national post-Covid-19 recovery plans as part of the Next Generation EU recovery plan, of which Italy is the main beneficiary.
Mr Giorgetti said he supported the political agreement “in a spirit of inevitable compromise”. Considering the future rules to be “more realistic” than those in the current Pact, he welcomed the fact that the EU Council’s agreement would promote “a realistic and gradual reduction in public debt” and “look constructively at investments, particularly in the Recovery Plan”, according to comments reported by the ANSA agency.
Trilogues. Negotiations with representatives of the European Parliament, who agreed their position 10 days earlier (see EUROPE 13311/22, 13312/29), should begin in early January with the aim of finalising an overall agreement before the end of the current legislative cycle. The EU Council’s negotiating mandate will be formally adopted this Thursday at the meeting of the Member States’ ambassadors to the EU (Coreper).
One of the key elements to be negotiated with the European Parliament concerns the safety margin below the 3% public deficit threshold, which the MEPs did not include in their negotiating position. (Original version in French by Mathieu Bion)