Wed. Feb 12th, 2025

Policy brief by Lucio Pench

Brussels, 16 May 2024

The debate on the reform of the European Union’s fiscal rules, the Stability and Growth Pact, has largely focused of their design. This nearly exclusive focus has distracted attention from the equally, if not more, important aspects of implementation. The reform, completed in April 2024, left implementation unaddressed, or at least open to very different potential outcomes.

In particular, the reform failed to clarify the interplay between EU countries’ medium-term fiscal structural plans (MTFSPs), which embody the new focus on debt sustainability, and the excessive deficit procedure (EDP), which remains the main enforcement tool under the rules. The need for clarification is urgent as several countries are set to enter EDPs for breaching the SGP’s 3 percent of GDP deficit threshold at the same time as their first MTFSPs are endorsed in autumn 2024.

There is a risk that the adjustment paths prescribed by EDPs may be at least temporarily less demanding than the debt-sustainability requirements of the MTFSPs would normally imply. Even if consistency between EDPs and MTFSPs is ensured from the start, inconsistencies may arise over time and be resolved in a way that further postpones the necessary adjustment.

The main risk is that the 3 percent of GDP deficit might be perceived as the only target that matters for countries that enter EDPs in 2024, as repeated revisions of the MTFSPs undermine the cogency of the debt sustainability requirements. This scenario is likely to materialise if the countries are allowed to exit their EDPs upon bringing their deficits to or below 3 percent of GDP, while being still far from the necessary correction of the debt trajectory.

It is important to shape countries’ expectations on the implementation of the upcoming EDPs in a way that is conducive to the immediate internalisation of the debt sustainability constraint implied by the new rules, rather than allowing it to be viewed as a distant objective. This change in expectations could be achieved by clarifying that, even if a country has been placed in an EDP only for breach of the deficit criterion, it should also satisfy the debt criterion for the procedure to be abrogated.

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Lucio Pench is a non-resident fellow at Bruegel. He was director for macroeconomic  policies in the European Commission from 2011 to 2023. In particular, he was responsible for the elaboration of the Commission position on the design of the framework for the EU surveillance of budgetary policies, including in relation to national frameworks and the long-term sustainability of public finances, and the monitoring of macro-fiscal issues, including in relation to monetary policy. Having joined in 1989, prior to his appointment as director Mr Pench held a number of positions in the Commission, mainly in the field of macroeconomic policies, including a stint in the group of the President’s policy advisors.

His research interests focus on issues of economic governance, particularly in the context of European integration, from a macroeconomic and institutional perspective. An Italian citizen, Mr Pench holds degrees from the University of Pisa and the Sant’Anna School of Advanced Studies in Pisa as well as a master’s degree from the Fletcher School of Law and Diplomacy at Tufts University.

 

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