Italy will have to cut debt by 1 percent per year as EU approves new stability pact

Brussels – Green and digital transitions are safe. Member States will have the way and time to spend on the top priorities of the European Union’s agenda. At the same time, the deficit and debt reduction trajectory becomes more clear, binding, and challenging, too. The Economy and finance ministers agreed on reforming the Stability Pact at the end of the extraordinary informal meeting held today. “Good news for the European economy,” according to Paolo Gentiloni, EU commissioner for the Economy. He was concerned about an about to expire 2023 and the possibility to run out of useful time needed to restore confidence for investors and markets. But this good news may not be too good for countries like Italy, with accounts more in disarray than others.

Among the safeguards introduced to the new pact, countries with a debt-to-GDP ratio above 90 percent will have to reduce this ratio by 1 percent each year, and those with a deficit/GDP between 60 percent and 90 percent by 0.5 percent a year. Italy will therefore have to reduce its debt by one percentage point per year, on a par with Belgium, France, Greece, Portugal, and Spain. So Scholz’s hard line, who had already set this goal in the early days, finally passed.

Not only that: like everyone else, Italy will also have to reduce the deficit because the other safeguard also dear to the Germans of creating preventive spending margins passed.

It is impossible to eliminate the 3 percent deficit/GDP and the 60 percent debt/GDP ceilings because they are part of the Treaties on the functioning of the EU. Thus the benchmarks remain, although with one change: the agreement stipulates that even those who do not exceed the 3 percent ceiling must reduce it to create a 1.5 percent gap so they can be ready in case of shock without pressuring national accounts.

EU Member States can choose to embark on a four- or seven-year reduction trajectory with a less harsh workload. For countries with a deficit/GDP over the 3 percent threshold,  a 0.4 percent-a-year adjustment is required over four years, which becomes 0.25 percent a year over seven. However, Italy gets a transitional clause that considers the increased interest cost on the public debt repayment due to the interest rate increases by the ECB. The agreement provides that until 2027, there will be a flexible application of the fiscal rules, with the Commission considering the increased burden from rising rates without affecting spending margins, which are especially useful for the double transition.

“There are some positive things and some less,” according to the Italian mister of Economy, Giancarlo Giorgetti. “Italy has achieved a lot”, he pointed out. “Above all, what we sign is a sustainable agreement for our country that is aimed at realistically and gradually reducing debt, and that looks at investments, especially of the NRRP in a constructive spirit.” It may not be the best possible outcome, but “we participated in the political agreement for the new Stability and Growth Pact in the spirit of the inevitable compromise in a Europe that requires the consensus of 27 countries.”

However, now the reforms will have to be undertaken because the Commission’s fines will become real and no longer theoretical. As a guarantee of the reliability of governments in the path of reforms, the excessive debt procedure is tightened, making it more effective. Until now, fines, though provided for, have never been imposed. The Commission intends to reduce the size of the  fines (currently provided for an interest-bearing deposit of 0.1 percent of GDP to a fine of 0.2 percent of GDP) but to apply them more.

Critics came from the opposition side. “In a few years we will have to cut health and education while being able to invest more funds for the purchase of arms and ammunition: if it were a movie it would be called ‘the perfect suicide for Italy,'” criticized Tiziana Beghin, head of the 5 Star Movement delegation in the European Parliament. “We hope that in January, during the trilogue, negotiators in the European Parliament will be able to modify this agreement for the better and increase the space for investment, without which we are facing dark years.”

Trade unions, meanwhile, talked about “self-sabotage” operated by the EU and its Member States. As the Confederation of European Trade Unions (ETUC) pointed out, this agreement would imply public spending cuts for many governments. “This agreement is bad news for millions of workers struggling with the cost of living,” lamented the general secretary Ester Lynch.