Enrique Viguera
Ambassador of Spain
One of the greatest successes of the past Spanish presidency was achieving political agreement in the Council of the European Union on the new fiscal rules, the adaptation of the Stability and Growth Pact, whose application the Commission suspended with the pandemic, in March 2020, with the general escape clause in order to allow member states to invest above the limits established in the Treaty, 3% of public deficit and 60% of debt.
The agreement is largely based on the Commission’s own proposal (two Regulations and a Directive) to reform the SGP which, based largely on compliance with short-term fiscal ratios, was considered by many to be too inflexible and difficult to apply, despite having been adapted on several previous occasions (‘Six Pack’, ‘Two Pack’, ‘Fiscal Compact’ etc.). We should not forget that the first countries to breach the deficit limit were precisely Germany and France, and both have breached it more often than Spain. Only three countries, Finland, Luxembourg and Estonia have never breached it. So, with its resurrection announced, it was necessary to adapt it to the current international and national economic reality (in which six member countries exceed 100% public debt), for which the important experience accumulated over several decades had to be taken into account. A ‘trialogue’ between the institutions (Council, Parliament and Commission) is now underway to ensure its implementation this year, 2024, but with effects already in the 2025 budgets.
In essence, the deficit and debt rules are maintained but their achievement is made more flexible by establishing fiscal paths for their reduction every four years independently for each of the non-compliant member states according to their own figures, extendable to seven years, with conditions, especially if they commit to structural reforms. Although it will be the states themselves that will design their gradual reduction process, for countries with public deficits and debt above 3 per cent and 60 per cent respectively – as is the case of Spain at the moment – the Commission will propose a ‘technical path’ on which the path proposed by the states will have to be based. For states with debt above 90%, the reduction must be 1% per year, even if they have a budget deficit of less than 3%.
The supervision mechanisms are basically the same: the Commission will monitor compliance with what has been agreed and may open sanctions proceedings if the path is not complied with, taking into account the economic situation, structural reforms and investments (technological and green transition), including defence. If the adjustment is not complied with, the fines can amount to 0.05% of half-yearly GDP (around €680 million in the case of Spain).
In the end, a balance seems to have been struck between Germany, the champion of the so-called ‘frugal’, which is in favour of reducing the high deficit and debt figures that some have reached after the pandemic – and Russia’s invasion of Ukraine – and France (and Italy – Spain), which advocates the need not to sacrifice certain investments: neither debt interest, nor European funds, nor unemployment will count in the reduction of the path. In the absence of genuine European taxation, a number of state investments are conceived as an indirect fiscal incentive, just like structural reforms. But will they be enough in the event of a crisis or will new European investments such as the ‘Next Generation EU’ be needed to ensure a balance between growth and debt reduction?
The million-dollar question is whether the new rules will be effective in enabling the EU to cope with the next financial crisis. It will certainly be in a better situation than before. They are somewhat more flexible, but probably not flexible enough. It will certainly not be the ultimate solution. I think we could have gone a bit further, given the current level of European integration. The system still seems too complacent, according to some, to ensure that Member States will respect it more than before. Moreover, the fact that the rules are complex may make them difficult to implement in a eurozone whose imperfect governance is no guarantee of compliance either. Basing everything exclusively on the balance between the Commission and the Council, as in the past, may not be the most appropriate because, ultimately, as we have seen, it lends itself too much to political compromises. Perhaps that is what is really being sought – because it is in times of crisis that greater flexibility is needed – but the opportunity could also have been taken to give a somewhat more decisive role to the independent fiscal institutions in this interinstitutional balance.
Finally, there are several additional elements that may end up affecting its effectiveness in the event of a serious crisis. It will be essential that the will of member states to comply with the new rules prevails, but it seems that the Pact has been the result of a compromise between two schools of thought that remain at odds, and the division of opinions is not good for the application of rules in times of difficulty. Let us hope that the next crisis(s) the EU has to face with the new fiscal rules will not be worse than the last one. It will be easier to roll them out as long as economic growth is achieved, even if the rates are modest as they are now, but that is no longer the case at the moment for the Eurozone’s main economy.
Spain can now prepare itself to adapt to the rigour that lies ahead after the renewal of the Pact. For the time being, the Commission has already recommended to the Spanish government to limit primary expenditure growth to 2.6% and has already warned that it will open an excessive deficit procedure next spring on the basis of this year’s budget closure. The new Spanish Finance Minister, who seems to have played an important role in the conclusion of the agreement, as part of the Presidency team, given his experience in the Commission itself and in the AIReF, as a great expert on the sustainability of public finances, will undoubtedly be a key factor for the current government in the design of this new fiscal transition, deficit and debt reduction, which Brussels is forcing us to undertake. This will certainly not be an easy task, given the behaviour of the Spanish economy and, above all, of public spending in recent years.
*Former Director General for Integration and General and Economic Affairs of the EU
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