0.2% of GDP in investments and a profound difference on whether the adjustments should be made taking into account the interests of the debt or not. These two elements are, right now, the main obstacles that separate the finance ministers of the 27 from an agreement on the fiscal rules and economic governance of the Eurozone. They are not the only ones and they are not even enough by themselves for there to be white smoke tonight, which the Spanish vice president, Nadia Calviño, responsible for the negotiations at Ecofin as acting president of the EU Council, anticipated as “long” and complicated. But without solving them, there is no possibility of moving forward.
The situation can be summarized, greatly simplifying, in that over the last few months most of Germany’s demands, or at least the most difficult to digest, have been accepted one after another. The philosophy of the new rules, which must replace a Stability Pact that has aged poorly and is clearly obsolete, relies on a spending rule as the main element to maintain control of the countries, especially those with the most imbalances. And the idea was to have adjustment paths, initially four years but extendable in a fairly ‘simple’ way to seven, personalized, taking into account the circumstances of each economy.
But Germany demanded in April that there be a fiscal adjustment of at least 0.5% in all countries that have deficits above 3%, and it got it. Germany wanted a mandatory minimum reduction for all countries with high debt, and it has achieved it, with an annual average of 1% for those who have more than 90% of GDP and 0.5% if they are between 60% and 90%. And it has also demanded that even countries that are in balance, with less than a 3% deficit, still have to make important fiscal efforts, of 0.5% structural, to reduce their deficits to 1.5%, so that there is a very broad buffer, and that the thresholds of the Pact are not a lax objective.
The essence of this economic governance agreement is that there had to be a balance between adjustments and investment. Do not make the mistakes of the past and do not allow investment to be the first thing to be cut off suddenly when crises arrive. The hawks have been playing their music these months of the Spanish presidency, without rushing and without giving in too much. And now it is France, Italy and basically Spain, although it is the presidency, who want their part. They have obtained some permissiveness to deviate from the spending ceilings, between 0.25% and 0.5% in a year and up to 0.75% if accumulated. They have achieved flexibility so that in the case of procedures, expenses in Defense and perhaps in other things are a mitigating factor.
And now Paris, through the mouth of its minister Bruno Le Maire, has made it clear that investment is a red line. They have accepted all of Germany’s, but they are not going to allow “fatal errors” to be repeated, and therefore demand that countries be able to compensate for this structural effort of 0.5% with powerful investments, up to 0.2% of GDP. They believe that it is suicidal to force important investments to be postponed for four or seven years, the adjustment periods. And they have said enough.
The second issue, defended by the Spanish presidency, is also about structural adjustment and has to do with the way of thinking about it. The proposal of the last document is that it be a primary adjustment, without taking into account the interest on the debt. Berlin, The Hague or Helsinki did not want it because what is now in the corrective regulation satisfies them, but the main economies, which in 2024 are all going to enter into an excessive deficit procedure as a consequence of the expenses and investments to keep the economy alive after the pandemic and the Russian invasion, yes.
The idea floats, but it will surely be sacrificed in exchange for maintaining investment levels, that 0.2% that Le Maire says. Whenever someone is in an excessive deficit procedure, or at least the next four years, which is, they say “something exceptional.” Everything depends on these balances, impossible in theory, inevitable in practice.
