Positive take on Stability Pact proposal
Analysts in Athens describe the European Commission proposal for the revision of the Stability and Growth Pact, as far as Greece is concerned, as a positive basis with partial problems. This is a proposal that signals a return to fiscal discipline as of 2024, when the new rules are set to come into effect, ending the period of relaxation brought on by Covid-19 and the energy crisis.
A key element of the proposal that is certainly positive for Greece is the abolition of the so-called 1/20 rule – i.e. the obligation to reduce the debt of each member-state every year by one-20th of the excess amount of 60% of the country’s gross domestic product. That would oblige Greece to show unrealistic primary surpluses of 6-7% of GDP per year, plunging it into austerity and depriving it of growth support. Of course, in practice this rule had been circumvented, but it definitely had to be formally abolished as well.
The Commission’s proposal remains orientated toward debt reduction, but it sees it achieved in a different way. It sets aside the application of a general rule for all and prefers an approach adapted to the needs and capabilities of each state.
The focus point will be a “holistic medium-term plan,” which will incorporate not only fiscal goals, but also reform and investment milestones, lasting four years, with the possibility of extension for another three.
The Commission, based on the debt sustainability analysis of each member-state, will recommend a fiscal path that will ensure the downward trend of the debt. Then the member-states will submit their plans, which they will own and which will include reforms and investments to ensure the fiscal recovery course. These plans will be approved by the Council of Ministers, following a Commission recommendation.
This a-la-carte approach is certainly more flexible than the general rules and satisfies Greece. Conversely, it does not seem to appeal to states like Germany, which prefer strict, quantitative targets.
A critical role in these plans and a point of reference for monitoring will be the path of “net primary costs,” which will be agreed, in order to ensure the downward course of the debt. In practice, the increase in these expenses cannot exceed the increase in the medium-term GDP. On the negative side for Athens, neither investments nor defense spending are excluded.
