By Silvia Marchetti
ROME (MaceNews) – Rome will push for a revision of tight European fiscal rules to take into account a post-COVID economy, allowing member states to run higher pro-growth deficits net of strategic investments without running into sanctions, according to Italian ruling coalition sources.
“There’s growing consensus in Europe on the need to make the Stability and Growth Pact (SGP) more lenient following pandemic spending, and we are ready to spearhead the debate at EU level against such tight fiscal rules that are way outdated,” said an official source.
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%. Brussels has decided the pact will be frozen for this year, too.
“Italy’s debt was at 130% before the pandemic broke out but now, after having spent so far over EUR120 billion to tackle the economic impact of the virus, we’re heading towards 160%. When the SGP freeze will terminate, those rules must be changed through a comprehensive assessment and involvement of all countries. It is unthinkable, and practically impossible, to revert back to a pre-COVID fiscal framework,” said another official.
Sources argue the Stability and Growth Pact should be simplified with a clearer framework, fewer and less strict rules that take into account the different growth rates of member states and their varying economic vulnerabilities. Italy currently has the second-largest debt in the eurozone, followed by Greece at 200%, but France’s public finances are also under strain.
“It is clear that alongside the SGP pact, all other EU fiscal agreements linked to progressive debt reduction per year such as the Fiscal Compact and “Six Pack,” must necessarily be modified, if not abolished all together as they don’t take into account extraordinary and prolonged economic phases as the current one.”
Austerity has had some positive results in recent years but in many cases has also turned out to have a boomerang effect on investments and pro-growth measures aimed at boosting internal demand, added the sources. The COVID-19 pandemic now calls for “a new era of greater fiscal accommodation needed to tackle the the long-lasting ripple effects of the virus crisis,” said one source.
Rome supports a revision of the 3% deficit-to-GDP threshold to include a “special treatment” of key structural public investments (the so-called ‘golden rule’) able to impact on long-term growth that should be exempted from the total deficit calculation.
“We’re not saying deficit should be net of all public investments, but only those that will have a long-standing outcome on the economy and industrial system, such as strategic infrastructures, the ecological transition to a greener and digital economy, and measures aimed at favoring the business environment,” explained an official.
Strict debt and deficit rules make it impossible to curb public finances in tough times, particularly since there is no certainty of when the globally and European economies will go back to ‘normal’ again. Rome believes debt reduction remains paramount, but it should be gradual and can’t occur suddenly or at the same pace each year. Country-per-country differences should also be taken into consideration.
The EU rule of reaching a medium-term objective (MTO) of a balanced structural budget must also be changed following the pandemic, for it depicts an “unreal scenario” and has countries running after an “idealistic, distorted fiscal goal” which they hardly ever meet, said an official.
The principle of greater leeway in the timing of the fiscal adjustment path to attain the MTO must be reinforced and should also consider the different ‘speeds’ of member states.
Another EU parameter to reconsider in analyzing national budgets is the so-called ‘output gap’, the difference between real and potential GDP which the European Commission uses to calculate excessive deficits. In past years, sources complained that Brussels had mis-calculated Italy’s effective output gap by narrowing it, thus granting less fiscal leeway.
“Before the pandemic there was a wide difference between Italy’s real and potential GDP, today that gap is huge, as for all member states running higher deficits to support the ailing economy,” said an official.
The SGP is the founding treaty of Europe’s monetary union and any changes to it must be discussed and approved by all eurozone parliaments.