Once the coronavirus pandemic has been overcome, Europe returns to adjustment and will tighten its economic policy in 2024

The European Commission will demand adjustments to the ten countries that exceed 3% of public deficit.

The era of economic broad sleeve in Europe is coming to an end. At the start of the pandemic, in March 2020, the European Commission activated the suspension clause of the Stability Pact. In practice, it meant that governments were no longer obliged to implement budgetary policies aimed at reducing the public deficit below 3% of GDP and public debt below 60% in the medium term.

That Stability Pact was never strictly complied with, and when it was necessary to impose sanctions for non-compliance they were not imposed, because it was, in the words of a former president of the European Commission, a “stupid pact”. It was procyclical, too rigid, the same for everyone. Only Germany and France failed to comply on 14 occasions without consequences.

The solution was to suspend it and this year it is being reformed to be applied again in a more flexible and individualized way country by country and not as a straitjacket that must fit everyone equally regardless of their economic situation. But its application, still flexible, will lead to the end of that wide sleeve and in many countries the time for adjustments will return.

The European Commission warned this Wednesday that on January 1 it will apply it again: “The end of the period of force of the general safeguard clause will mean the resumption of the specific recommendations per country on fiscal policy, quantified and differentiated according to the challenges of the Member States in matters of public debt”.

The 27 governments of the European Union are already obliged to send a document to Brussels in April with the path of fiscal adjustment. Reuters Photo

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The European Commission wants adjustments. They will not be the years after the 2008 financial crisis, which sank even more economies that were already tottering, but for some governments they will be budgetary sacrifices.

The 27 governments of the European Union are already obliged to send to Brussels in April a document with the path of fiscal adjustment that the 2024 budgets will follow in the coming years and in the autumn, taking into account these new indications.

-Adjust to the fiscal objectives established by the Member States in their stability and convergence programs provided that such objectives are compatible with the guarantee that the public debt ratio follows a downward path or remains at a prudent level and that the budget deficit falls below the reference value of 3% in the medium term.

The president of the European Central Bank, Christine Lagarde. Photo EFE

-Quantify and differentiate according to the difficulties of the Member States in terms of public debt.

-Formulate on the basis of net primary spending, as proposed in the Commission’s reform guidelines (of the Stability Pact). That would leave out the interest expense of the debt.

Ten European countries fail to meet today without consequences the objective of the deficit below 3% of GDP. If they continued like this in April 2024, they could see how the European Commission opens deficit procedures. The consequences of these eventual procedures remain to be seen because they would depend on how the reform of the Stability Pact turns out.

The new pact is practically closed. The public deficit targets below 3% of GDP and public debt below 60% will be maintained, but the entire system will be more à la carte to design differentiated fiscal paths country by country in an attempt to make them easier to comply and the fines will be less so that, if necessary, they can be applied.

Electoral cycles will also be taken into account. If after elections there is a new government, it may ask to renegotiate that budget path.

The European Commission returns four years later to pre-pandemic budgetary life: “The Commission will propose to the Council the opening of deficit-based excessive deficit procedures in spring 2024 on the basis of 2023 execution data,” it says the notice.

The Vice President of the European Commission for Economic Affairs, the Latvian Valdis Dombrovskis, said on Wednesday that after events such as the pandemic or the Russian aggression against Ukraine “it is time to focus on future growth and debt sustainability. We want member states to set ambitious fiscal targets for 2024, credible debt reduction trajectories and identify how they will use reforms and investments to achieve inclusive and sustainable growth.”

Dombrovskis must be like a kid with new shoes. When he was appointed in the summer of 2019, it was understood that he was the commissioner in charge of applying the Stability Pact. But a few months later the Stability Pact ceased to apply and Dombrovskis was compensated with the Trade portfolio.

Its well in a joy because right after the trade negotiations derailed with Mercosur or were left aside with the US. When the Stability Pact is applied again, he will have a few months left in office, until the European elections in May 2024.

PB

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