On January 13, the European Commission issued new guidelines, to the European Parliament, the EU Council, the ECB, the EIB, the Economic and Social Committee and the Committee of the Regions, for “making the best use of the flexibility within the existing rules of the Stability and Growth Pact” (SGP). The report underlines that the existing rules apply with no modifications, and that the guidelines aim at reducing the scope for discretion in their application, a complaint often made by smaller EU members.
The guidelines were much awaited, for political and a technical reasons. From a political point of view, Prime Minister Renzi and President Hollande had much invested into promoting an exchange of “structural reforms” for “less austerity” and into promoting an active role of the EU in fostering investment and growth (the Juncker plan). Technically, the waves of revisions and additions to the Stability and Growth pact had raised the complexity of the European rules to a matter for EU exegetes, so that a clarification and simplification was due. In fact the Communiquè ackowledges that “The Commission now gives Member States additional certainty on how it
will apply the Pact. Equal treatment of all Member States and
predictability of the rules are at the core of the Pact”.
The guidelines cover 3 issues: the structural reform clause, the investment clause and the cyclical conditions.
The exchange of structural reforms for less austerity works as follows. Consider a country implementing (or credibly committing to) a “major” reforms that has positive growth and budgetary effects. Then there are three cases:
- if the country is not under an Excessive deficit procedure (EDP), it may be granted a temporary deviation from the adjustment path toward the Medium term objectives (MTO), for at most 0.5% of GDP. The MTO is supposed to be reached within 4 years anyway, and the country must not violate the 3% deficit limit.
- If the country is in the process of falling into an EDP, it may be granted extra time for reaching the MTO;
- if the country is already in the EDP, it may get extra time, conditional on having respected the previous fiscal commitments.
Case 1 is taylor-made for Renzi’s Job act, and gives legitimacy to the Italian deviation from the MTO in exchange for the labor market reform. Case 3 may help France, Spain, Portugal, Ireland, Poland which are under the EDP scrutiny (see Table 1) although it is unclear whether all these contries may qualify for the extra-time (France may not).Notice that this “structural reforms” clause rewards past fiscal discipline by giving countries not in the procedure a better bargain.
|Table 1: Ongoing Excessive deficit procedures
|Country||Date of the Commission report
|Council Decision on existence of excessive deficit (Art.104.6/126.6)||Current deadline for correction|
|Croatia||15 November 2013||21 January 2014||
|Malta||21 May 2013||21 June 2013||
|Cyprus||12 May 2010||13 July 2010||2016|
|Portugal||7 October 2009||2 December 2009||2015|
|Slovenia||7 October 2009||2 December 2009||2015|
|Poland||13 May 2009||7 July 2009||2015|
|France||18 February 2009||27 April 2009||2015|
|Ireland||18 February 2009||27 April 2009||2015|
|Greece||18 February 2009||27 April 2009||2016|
|Spain||18 February 2009||27 April 2009||2016|
|UK||11 June 2008||8 July 2008||financial year 2014/15|
The Communiqué clarifies that countries’ outlays to the new European Fund for Strategic Investment, the vehicle for the Juncker investment plan, will not be counted for the deficit and debt criterion. Moreover, an “investment clause” specifies some extra-room for investment for countries in recession. A country is allowed to deviate from the adjustment path toward the MTO, provided a) the investment has measurable positive effect on growth and public finances, b) the country is not under an EDP ; c) the country is in recession (defined as negative growth or output below 1.5% of potential); d) the deviation is temporary, e.g. it is compensated within the time framework agreed in the convergence plan, and does not lead to violation of the 3% deficit limit d) the investment is co-financed by EU institutions.
The conditions for getting extra-space for investment are quit stringent, and yet the investment clause may be exploited by a relatively large number of countries. Table 1 and 2 show that countries that satisfy conditions b) and c) include Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Iceland , Italy, and the Netherlands. Again, not being part of the EDP club has quite a few privileges.
|Source: EU Commission|