By Silvia Marchetti
ROME (MaceNews) – Italy is pressing its European Union partners to define new, more relaxed fiscal rules for the post-Covid era and warns of financial instability ahead unless the EU acts quickly, according to ruling Italian coalition sources.
The debate at EU level on the need to reform the Stability and Growth Pact (SGP) has only just kicked off and there is one year to come up with a new framework before the fiscal rules freeze is lifted, with Rome still to forward its position paper.
Sources warned that “time is of the essence” and that Europe can’t afford to waste precious months ahead, with the risk of financial hazard in the near future linked to member states’ piled-up public debts.
“In January 2023 the SGP pact will be re-activated and it’s quite clear we can’t revert to the past rules simply because budgets are way beyond the fiscal parameters. During the pandemic all governments across Europe were allowed to run higher deficits, and the outcome is now that public debts have spiked everywhere. Italy alone has gone from 130% to current 151% this year, while the deficit is at 5%,” said a League party official.
The Stability and Growth Pact, which was suspended in the wake of the virus emergency, forbids European countries from running deficits over 3% of GDP and public debts over 60%.
“Those strict rules, quite unrealistic in the present scenario, must be changed through a comprehensive assessment and involvement of all countries. Going back to a pre-COVID fiscal framework is off-the-table,” said another Democrat official.
Sources argued that once the SGP freeze is lifted, European countries, especially those with the highest public debts, could find themselves exposed to market volatility threats in the absence of a new European fiscal framework shield that legitimizes more accommodative budgets.
EU members share the goal of reforming budgetary constraints but there are differences among them in the degree of flexibility, with the northern bloc more inclined toward austerity. Officials warned the road ahead is bumpy and uphill.
“One year to discuss, define, and then green light new fiscal rules, with some sort of involvement by national parliaments, is really a very short timeframe considering the significance and impact a new fiscal scheme will have. We must act quickly or we might end up facing a dangerous showdown, and the last thing Europe needs is a new wave of financial instability,” said the League official.
If pro-growth fiscal rules aren’t adopted before the end of next year European countries would face massive piled up public debts due to pandemic over-spending which in the absence of new fiscal rules could make public finances unsustainable.
The Democrat official argued as well that no country, not even Germany, could cut deficits and debt overnight given that pro-growth accommodative budgets are likely to stay in the short-term to support post-COVID recovery.
There’s also another key issue which must be considered that could further raise market volatility. “The European Central Bank’s assets purchases program won’t run forever. On the contrary, it is very likely there will be a general unwinding of monetary policies which will coincide with the end of the Stability and Growth Pact freeze,” said the League official.
Even though Rome has spearheaded consensus at EU-level for more lenient fiscal rules, the government has yet to present its official position paper. Sources argued that given the complexity and priority of the matter, the presidency of the council of ministers would be dealing with it directly.
Sources noted that a revised Stability and Growth Pact should take into account the different growth rates of member states and their economic vulnerabilities. Key public investments should be exempted from the deficit threshold and greater leeway in the timing of the fiscal adjustment path should be introduced.
Alongside the SGP pact, the League official noted that all other EU fiscal agreements linked to progressive debt reduction per year (such as the Fiscal Compact and Six Pack), must necessarily be modified as well.
The SGP is the founding treaty of Europe’s monetary union, and any changes to it must be discussed and approved by all EU member states’ parliaments.