THEthe new Stability Pact European Union, which will formally come into force on January 1, 2025will not help investments in the green and digital transition and in common defense and this is why focuses too much on budget ruleswithout making a distinction regarding productive spending and therefore, in fact, risks discourage investment. This is what emerges from a study by Scope Rating conducted by analyst Alvise Lennkh-Yunus, according to which the new rules would entail significant fiscal adjustments and cuts in public investment at a time when economic growth prospects are already weak.
Phase of economic weakness
The new rules – explains the agency – would come into force at a time when the medium-term economic growth prospects of the EU are already weak around 1.4%. According to estimates by the Bruegel Institute, respect for the rules would result in a medium fiscal consolidation approximately annually 0.8%-1.2% of GDP over a four-year period for highly indebted countries
countries such as Belgium, Italy, Spain and France. Among the least indebted countries, the fiscal adjustment needed to comply with the new rules would be small.
Complex rules and focused on tax positions
The new European standards they would focus too much on fiscal positions of individual countries, evaluating the progress of each of them based on the growth of net primary expenditure. And therefore they would prove unsuitable for the purposes of creating a permanent fiscal capacity necessary for the provision of public goods at a European level.
Furthermore, the budget rules remain very complex and, while there is greater flexibility, it is unlikely to translate into greater compliance. However, maintaining eligibility for the ECB's Transmission Protection Instrument could provide an important incentive.
The new rules only partially fulfill the objectives of creating a simple, flexible and credible framework, better than the existing one. As for simplicity, the replacement of the “structural deficit” as a control variable with net primary expenditure it is positive as it will reduce controversies over the unobservable “structural deficit” and the “output gap”.
As for the flexibility, individual adjustment plans and their possible extension present uncertain outcomes. While they can incentivize growth-enhancing reforms and investments, on the other offer to Member States the possibility of postponing and deviating from necessary budgetary adjustments, which could prove negative for the rating. Credibility and effective compliance are unlikely to improve and may even weaken.
Consolidation plans conditioned by ratings
Scope expects that i consolidation programs tax of European states will continue to be influenced from the evaluations of investors and rating agencies on their creditworthiness, rather than relying solely on the new EU tax rules. The credibility of fiscal rules is important and contributes to Scope's sovereign rating assessments. The analysis considers the credibility of fiscal policy together with expected public debt dynamics, so compliance with credible fiscal rules is positive for credit.
A missed opportunity
In the EU context, a credible fiscal framework should not only focus on sustainable adjustment paths of individual budgetary positions – underlines Scope Ratings – but should also include the creation of permanent financing capacity to credibly address green and digital investments and common European defense spending.
While acknowledging the political compromise that this would entail, the revised framework represents a missed opportunity in the current geopolitical context, especially after the outcome of the American elections and in light of the considerable risks resulting from the Russia-Ukraine war.
