Changes to the Stability Pact bring cuts in public spending

The representatives of the Euro area governments and the European Parliament concludes the final text of the revised fiscal rules, based on the set-up agreed in the Eurogroup, just before Christmas. Governments with excessive debt will have more time to reduce it and so will not need to drastically cut public investment. In return, they accepted the establishment of annual public debt reduction targets and limits on public spending.

Analysts estimate that the revised Stability Pact will force governments to cut spending which will weigh on already weak growth performance. In 2023, GDP grew by just 0.5%, while this year the ECB predicts growth of 0.8% for the Euro area.

According to an analysis by BNP Paribas, the new fiscal requirements will subtract 0.1%-0.2% from GDP over the next two years. The biggest impact will be on Spain, required to reduce in 2025 its structural primary deficit by 1 additional percentage point, compared to the previous plan. The impact will be small in Germany, where a decision of the Constitutional Court has already imposed a sharp fiscal adjustment.

According to S&P, France will continue to have one of the highest deficits in the Euro area for the next three years. Morgan Stanley estimates that among the four largest economies, France has the least chance of complying with the revised rules, while Italy will also struggle.

The big test will come when the new rules impose fiscal adjustments that will stifle growth and run counter to the wider strategic challenges facing the EU. Much will depend on the degree of flexibility with which the Commission will implement them. “This is not the deal of my dreams, especially since it is much more complicated,” admitted Economy Commissioner Paolo Gentiloni. “But when we reach the decision, we have to implement it and enforce it consistently.”

With these changes in the Stability Pact, a long process to overhaul the fiscal rules is completed, based on the lessons of the fiscal crisis. Having been at the center of it, it is useful for Greece to derive lessons as well.

A useful contribution is Nikos Garganas’ book Greece’s sovereign debt crisis and its economic aftermath. Analysis and Lessons (just published by Kerkyra Publications/economia Publishing). The former governor of Bank of Greece scrutinizes every aspect of the crisis and provides a truly comprehensive, articulate description and analysis of how and why the worst economic crisis in postwar Greek history was precipitated.
How did we escape a default? What did the government and such international institutions as the European Commission, the European Central Bank and the International Monetary Fund do to address the challenges that the country had faced? What progress has the Greek economy achieved since 2009-2010? What have we learned from the bitter experience of the sovereign debt crisis? And – last but by no means least – what must we do from here on to prevent a recurrence of past crises, enabling Greece to thrive?