The new guidelines on how the European Commission will apply the Stability Pact make explicit reference, for the first time, to a modulation of fiscal effort over the economic cycle. The first country to benefit should be Italy…….
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The EU Commission has unveiled its new guidelines for the application of the Stability and Growth Pact1. The strategy is linked to the lauch of the European Fund for Strategic Investments (EFSI), worth 315 billion euros over three years.
There are three main changes:
1) a “modulation” of Pact rules (on the size of the structural balance correction required by the “preventive arm” of the Pact) over the economic cycle. No adjustment is provided for if: a) real growth is negative, or the output gap is below -4%;
b) the output gap is below -3%, or smaller than -1.5% with below-potential growth, but only on condition of debt being less than 60% of GDP, and free from sustainability risks.
A 0.25% adjustment of GDP is sufficient if:
a) the output gap is between -4% and -3% and the debt-to-GDP ratio is above 60%, or is at risk of being unsustainable;
b) the output gap is between -3% and -1.5%, the debt below 60% (or sustainable) and growth above potential; c) the output gap is between -3% and – 1.5%, debt above 60% (or unsustainable), and growth below potential. A 0.5% correction is required if: a) the output gap is between -3% and -1.5%, debt is high but growth above potential;
b) the output gap is between -1.5% and +1.5%, and debt is not worryingly high. If the output gap is close to zero, but debt is high, or the output gap is larger than +1.5% and growth below potential, an adjustment in excess of half a point is required. An even greater correction may be required (higher than three-quarters of a point and even a full one per cent) if the output gap is above +1.5% and growth above potential, and/or debt is high. Previously, an average adjustment of 0.5% of GDP a year was provided for, and member states were generically invited to do more in case of a favourable economic cycle, or if their debt was high (and allowed to do less in case of a well-set economic cycle).
2) the “investment clause”, which allows a temporary deviation (and of modest entity) from the budget targets for works and programmes co-financed by the EU or by the EFSI. Respect of the debt reduction rule will no longer be necessary to benefit from this margin, but the new investments will have to be effective. In Italy’s case, assuming available resources are spent fully within the year, the margin would amount to 3.5 billion euros (almost entirely consisting of funds still not spent pertaining to 2007-2013 planning), i.e. 0.2% of GDP.
3) the “reform clause”: the Commission will make an ex ante assessment of the impact of structural reforms (not only in terms of their actual effects on potential GDP, but also on the degree of their implementation), in order to allow temporary deviations from budget targets. Concession of the margins described in the previous two points is tied to this assessment.
The most important change is the first of the points listed above: for the first time, a “modulation” of the size of the required fiscal correction based on the economic cycle is “put in writing” (with exact numeric parameters). In Italy’s case (output gap of -3.4% in 2015, according to the Commission, but high debt), the required adjustment is certified at 0.25% of GDP (instead of 0.5% as previously required), which should allow Italy to pass the “definitive” test of the Stability Law, due out in March. However, in order to both use the margins allowed, and prevent an infraction procedure for failure to respect the debt rule, Italy will have to invoke the reform clause, the implementation and effectiveness of which will have to be assessed by the Commission.
Quelle: BONDWorld.ch
Newsletter
