Stability and Growth Pact Reform Draws Criticism: “Devastating” Consequences Predicted. The words of Antonio Maria Rinaldi

The European Parliament approved, by a large majority, the reform of the Stability and Growth Pact, and what resulted is much worse than the previous one. .In detail, the preventive arm measure passed with 367 votes in favor, 161 against, and 69 abstentions. That of the corrective arm passed with 368 in favor, 166 against and 64 abstentions. Finally, the budget frameworks directive passed with 359 votes in favor, 166 against, and 61 abstentions.

The content of this reform, if implemented, would be devastating for the public budgets of European countries. Let’s quickly look at the most important contents:

• It maintains the Maastricht parameters that set the thresholds of deficit at 3 percent of GDP and debt at 60 percent., now unrealistic for the EU and respected by almost no one
• countries with debt above 90 percent of GDP will be required to reduce it by one percentage point each year; those with debt between 60 and 90 percent will have to reduce it by 0.5 percent.
• On the deficit side, member states will also have to leave a fiscal buffer of 1.5 percent of GDP below the mandatory 3 percent threshold.
• Countries in infringement proceedings for excessive deficits (above 3 percent) will be required to have annual return plans of 0.5 percent of the deficit.

Only three Italian MPs (and one , we are convinced, by mistake) had the courage to vote in favor of a decision that severely penalizes Italy. It will be necessary to apply fierce cuts in social services or substantial tax increases to achieve these objectives. This opens the door for recession, and not only for Italy. No Italian party will take responsibility for these measures.

The consequences will be severe, but they seem to affect only Italians, and few have had the courage to say anything. Here, for example, Member of the European Parliament and professor of economics Antonio Maria Rinaldi spoke out harshly against this rule. We offer his words here

To change Europe in deeds and not in words, it is first necessary to radically change the treaties, starting with economic governance.

But the new version of the Pact, instead of promoting a real investment policy, proposes reforms still animated by punitive goals and a highly procyclical framework dictated only by compliance with the deficit-to-GDP ratio and short-sighted obsolete budget constraints and conditionality that, together with the rules on state aid and a flawed ECB statute, do not remove at all the limitations of the previous one; on the contrary, it amplifies them.

Can the ambitious and onerous goals on defense, energy independence and digital in the coming years reasonably be achieved with the spending limits that this new Stability Pact will also impose on states?

Instead of devising a truly sustainable and easily enforceable one, the Trilogue has resulted in an even more highly procyclical regulatory monster that is worse than Commissioner Gentiloni’s April 2023 proposal, impossible to comply with and will not lead to any hoped-for growth.

If the Treaties are not amended first, starting with the annex to Lisbon Protocol No. 126, Art. 1, which sets the convergence ratios of 3 percent and 60 percent, no stability pact will be able to generate growth, just as if the so-called monetary statute found in the EU Treaty in Articles 123, 124, and 125 is not put in place.

In order to reduce the debt-to-GDP ratio, expansive policies with a high multiplier coefficient must be used to stimulate growth rather than relying solely on real cuts in primary current spending and higher taxes. Is there no knowledge of John Maynard Keynes in this classroom? Time is up, but only in the halls of the European institutions has anyone noticed?

This Pact will accentuate asymmetries, social injustices, divergence, and discord among the peoples of Europe, will not allow the growth we all hope for, and will condemn us to an inexorable decline by relegating us to last among all world economies.

A brief note: the European Parliament approved a measure that Mario Draghi harshly criticized in a recent speech due to its procyclical nature and strong income-punishing effects. However, German prejudices toward the superficiality of everyone else, who always thinks they are the smartest, got the better of them.