The new Italian right-wing coalition under Meloni will have to prove its budgetary discipline.
(Photo: dpa)
Three percent and 60 percent – these are the two key figures of European budgetary policy. These Maastricht criteria are intended to ensure that debt in the euro zone does not get out of hand. A country’s new debt should not amount to more than three percent of gross domestic product, and the total debt should not exceed 60 percent.
In its reform proposal for the Stability and Growth Pact, which is expected in November, the EU Commission will stick to these figures – at least pro forma. At the same time, it introduces a new interim target of 90 percent for particularly heavily indebted countries. For these states, the 90 is de facto the new 60: They have to find a sustainable path to debt reduction within four years and are under increased pressure to reform.
The Commission is thus capitulating in the face of the sad reality: after the corona pandemic, the debt in Greece is 186 percent and in Italy 148 percent. Portugal, Spain, France, Belgium and Cyprus also belong to the group of “high-risk countries” where public debt exceeds the 90 percent mark.
Under these circumstances, to insist that the debt must be reduced to 60 percent within 20 years, as the current rules stipulate, would not only be unworldly. It would also not be economically expedient, because an overly radical austerity course would lead directly to a recession.
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So the fact that governments are being given more time and flexibility to reduce debt is to be welcomed. An equally important innovation is that national governments should have more say in their debt reduction plans. The Commission hopes that the agreements will also be complied with. The plans should be more binding and more strictly controlled than before.
The decisive factor will be whether the rules can actually be better enforced in the future. That was the biggest shortcoming of the old Stabilization Pact. In view of the rising interest rates on the capital markets, the pressure on over-indebted countries remains high. The new government in Rome in particular will have to prove that it is continuing Mario Draghi’s reform course.
One look at the UK to see what happens when a government prioritizes fiscal discipline. After the negligent tax cut plans of the now resigning Prime Minister Liz Truss, a new government will have to struggle to win back the confidence of the markets.
More: EU Commission plans new interim target for debt reduction.