Brussels The planned reform of the Stability and Growth Pact will bring significant relief for highly indebted countries. You would have to save less than under the current debt rules. This is the result of a study by the Brussels think tank Bruegel.
The economists applied the “debt sustainability analysis” proposed by the EU Commission to all countries that violate one of the two Maastricht criteria (maximum 60 percent national debt, maximum three percent national deficit).
At first glance, the result is paradoxical: countries with debt levels of more than one hundred percent of gross domestic product will be able to take a slower approach to consolidation in the future. In almost all other countries, however, the pressure to save money is increasing compared to the old rules.
The 27 EU finance ministers want to decide on the reform of the stability pact by the end of the year. The talks are based on a draft law from the EU Commission from April. In it, the authority proposes to agree on a tailor-made debt reduction plan for four years with each government in the future. This should be determined by the “debt sustainability analysis”.
Six countries are heavily indebted
According to the Commission forecast, six countries will also have debt ratios of more than 100 percent next year: Greece, Italy, France, Spain, Belgium and Portugal. With the exception of Portugal, everyone would have to save less under the new rules than under the old ones.
The difference is most clear in Italy (debt ratio: 140 percent). While under the old rules the debt ratio would have to fall by four percentage points per year, under the new rules a consolidation of 0.1 percent is sufficient.
The reason: Until now, the one-twentieth rule applied – at least on paper. According to this, a government had to reduce at least one twentieth of its excess debt, i.e. the part of the debt above the 60 percent limit, every year. This rule will no longer apply in the future. Instead, each country should put its debt on a downward path within four years so that it is sustainable in the long term.
German debt ratio must also fall
Italy, for example, must first reduce its deficit to below the required three percent. During this phase, debts usually continue to increase. Therefore, the reduction in debt over the adjustment period of four years will initially be relatively low at 0.1 percent per year. After that, once the deficit is under control, debt reduction is expected to accelerate to 2.4 percent per year.
Conversely, the new method means that a country like Germany, which has a relatively low debt ratio of 64 percent, would have to save more after the reform than before. The German debt ratio would have to fall by one percent per year – instead of 0.2 percent.
However, the comparison with the old stability pact is flawed because the one-twentieth rule was never followed in practice because it was too drastic. The rule has led to “absurd requirements,” says Bruegel director Jeromin Zettelmeyer.
Overdue reform
He therefore considers the reform to be overdue. There can be no talk of a weakening of the Stability Pact. It’s more about setting up realistic rules to bring debts under control in the long term.
“Governments are still saving a lot,” he says. “But you don’t have to save more than necessary.” Thanks to the new “debt sustainability analysis,” it is easier to calculate when countries need to save.
According to the Bruegel study, the new method results in debt ratios falling on average 0.6 percentage points less over the four-year period than would be the case under the old rules. However, nine highly indebted countries still have to save more than two percent of their gross domestic product. “These are ambitious goals,” emphasizes Zettelmeyer.
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Federal Finance Minister Christian Lindner (FDP) wants to prevent the rules from being too lax in the future. Following his pressure, the Commission included the following four “safeguards” in the draft law:
- The debt ratio must be lower at the end of the four years than at the beginning.
- Government spending is expected to grow more slowly than the economy as a whole over the next four years.
- The debt reduction must be spread over the four years and must not be postponed until the end (no “back-loading”).
- The deficit must be reduced by at least 0.5 percentage points per year as long as it is above the Maastricht limit of three percent.
The rigid regulations are controversial because they contradict the basic idea of defining country-specific reduction paths. For France, for example, the first debt ratio requirement means particularly high savings pressure of 4.6 percent in the first four years. “It’s completely hopeless,” says Zettelmeyer.
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The “debt sustainability analysis” shows that France has relatively low interest rates, high growth and favorable demographic development in the long term. That’s why it doesn’t make sense to create this arbitrary pressure to save in the short term. He therefore advocates removing the “counterproductive” rule.
The main goal of the reform must be to provide comprehensible guidelines for reducing debt. According to the EU treaties, the Commission has no power to enforce compliance with the rules. For the economist, this means: “If you don’t have a penalty club, you have to reform the system so that the member states participate voluntarily.”
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