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After the truce forced by the unprecedented crisis of Covid-19, with the beginning of the economic recovery, hostilities return between the countries of the North and South of the European Union on account of the reform of the Stability Pact. While Spain, France, Italy or Portugal -which lead the debt ranking- ask relax deficit and debt rules to boost investment and not suffocate the economy with austerity; Austria, the Netherlands, Sweden or Denmark claim return to settings as soon as possible.
The Stability and Growth Pact – which sets the obligation to reduce the deficit below 3% and public debt below 60% – was suspended in March 2020 after the outbreak of the pandemic. In an unprecedented gesture, Brussels gave free rein to all governments to skyrocket public spending in order to cushion the economic impact of Covid.
The suspension will remain in force in 2022, but the Pact will be reapplied in 2023 in a very different environment: with debt levels skyrocketing in many Member States. Hence, Spain and Italy, the main affected by the pandemic, want to reform the rules before they are applied again, while the Nordics insist on return to normal as soon as possible.
The first shock of the post-pandemic era was experienced this Friday in the informal Eurogroup meeting held in Slovenia, which holds the rotating presidency of the Union. There, a group of 8 countries -among which are the self-described frugales but also the New Hanseatic League (referring to the medieval alliance of Nordic merchant cities) – has submitted a joint document for stand up to the southern claims of loosening the rules.
Reduce debt
“Nails strong public finances they are a central pillar of EU membership and the basis of economic and monetary union. Therefore, the fiscal sustainability combined with reforms that boost economic growth should continue to form the basis of the EU’s common economic and budgetary policy framework, “the document states.”Reducing excessive debt ratios must remain a common goal“, he continues.
This common position is an Austrian initiative and is also supported by the Netherlands, Denmark, Sweden, the Czech Republic, Finland, Latvia and Slovakia. These countries declare themselves ready to “improve” the Stability Pact, in particular with greater simplification and transparency. “But whenever the new proposals do not put at risk the fiscal sustainability of the Member States, the eurozone or the Union as a whole “, they point out.
Also, the Nordic countries are in no rush. The reform of the Stability Pact does not necessarily have to be completed before it is reapplied in 2023. “Quality is more important than speed“, concludes the document.
“It is no secret that there are very different positions on how we have to approach this revision of fiscal rules,” admitted the economic vice president, Nadia Calvin, during the Eurogroup in Slovenia. Contrary to what the frugal ones defend, Spain considers that “we have to tackle this reform before we get out of this exceptional situation caused by the response to the pandemic. “
Calviño has opted for a “simplification of the rules” and also “to adapt them to the reality we are experiencing and in particular to the investment needs derived from the recovery, a recovery that we want to be digital and green. “The Government of Pedro Sánchez would be in favor of introducing a golden rule in the Stability Pact that allows investments in the fight against climate change to be excluded from the calculation of the deficit.
“The green vector completely breaks the north-south dynamic because it is a cross-cutting vector, both Spain and Germany will have large investment needs “, explain sources from the Ministry of Economy. However, the Nordics reply that what it is about is to prioritize these investments in national budgets to the detriment of others and not to change the rules.
Kill growth
“We have to get back to sound public finances, but it has to be a progressive return. We must not kill growth“, said the French Minister of Finance, Bruno Le Maire, who is allied with Calviño’s thesis.” In previous crises, public investment was one of the variables most affected, many countries cut investment. This time we need to make sure that as we move into more normal times, let’s not cut public investment but leave room for public investment“, maintains his Portuguese counterpart, Joao Leao.
Even Ursula von der Leyen’s own Commission is divided. While the economic vice president, the conservative Valdis Dombrovskis, puts the emphasis on fiscal sustainability; the Commissioner for Economic Affairs, the socialist Paolo Gentiloni, supports the demand of the southern countries to facilitate investment.
“Clearly, we will need Realistic debt reduction paths for all Member States. We will have to find a balance between the need for fiscal sustainability and the need to support economic recovery, “said Dombrovskis in Slovenia.
“If we are serious about the climate transition, we have to avoid what happened with the previous crisis, when public investment was falling to zero. This cannot happen in the coming years,” he highlights Gentiloni. The debate on the reform of the Stability Pact will be formally reopened in the autumn, with the resumption by the Community Executive of the consultations that were interrupted by the pandemic. But with such a deep gap between North and South, no one dares to bet whether it will last for months or years. Not even if there will be an agreement in the end.
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