with the reforms the interests out of the calculation of the deficit – WWN

A holiday from interest rates on debt. If not in real life, because it never happens there except in the default case, at least in the reporting of new Stability Pact. But not forever: for now, only for 2025 and 2026. And in exchange for reforms.

The main one revolves around this concept concession that Italy seems to have obtained in the latest draft agreements on the new European budget rules. The structure of the emerging agreement, in itself, makes Rubik’s cube appear child’s play. It manages to be almost more complex than the old rules, which in theory it should have simplified, above all for one reason: each of the three main countries of the euro area – Germany, France and Italy – had an internal political problem to solve. And the accommodation of this sum of divergent needs could (perhaps) simplify the next steps for some governments, but at the price of doing little or nothing to solve Europe’s problems in an international order that certainly does not await the old continent with its its technological and defense delays.

The two fronts

Germany’s problem is to show that the Pact will be austere and inflexible, at least after 2027. That of Italy was and remains similar to that of France. In Brussels, the expectation at this stage is that both countries, together with others, must enter the corrective arm of the Stability Pact on 19 June 2024 – after the European elections. In other words, procedures for excessive deficit would begin for Rome and Paris which require a correction of the accounts, in theory, of around 0.5% of the gross product each year. For Italy this would involve a net budget squeeze of more or less ten billion in the next budget law and then in all subsequent ones until the deficit is brought back from more than 5% to at least 3% or below.

The constraint and the Budget

This constraint, in turn, risks significantly raising the bar for the next financial law: next year the government should in theory find around ten billion euros in savings, plus another 18 needed to refinance all the measures covered only “one-off” in 2024: from cutting the contribution wedge on the lowest incomes, to the unification of lower rates on personal taxation, to the cut on the license fee. Whatever the structure of the European rules demanded by Germany after 2027, the governments of Paris and Rome have therefore aimed to make the budget corrections in the coming years practicable for themselves: those that must lead to the vote for the Elysée in 2027 in France and a probable constitutional referendum in Italy (perhaps in 2026). For both countries it was a question of finding a way to reduce the size of the deficit correction, requested almost immediately, from 0.5% net per year to something less. For what follows, for how Berlin’s requests have made the Pact impracticable and unsuitable for investments from 2027 onwards, the‘intendance suivra.

Structural reduction

A first point for Italy and Franceacquired at the start, which the 0.5% reduction in the deficit is structural: the economic situation, now very weak, must be taken into account, therefore the demands for austerity must be reduced. But the second point concerns the interest on the debt. For Italy they will increase by over 10 billion (to 89 billion) in 2024, by another 5.5 billion in 2025 and finally by a further nine billion in 2026. Impress a net reduction in the red in the balance sheet while the cost of debt pushes in the direction otherwise, it would have made the next maneuver and the one after that even more difficult.

The possible agreement

But in the end – if the agreement doesn’t fall through – an agreement on this would be looming. At least in the most recent compromise drafts. It would avoid taking into account the weight of the increase in interest for the two-year period 2025 and 2026, perhaps extendable to 2027, but under one condition: each country thus benefiting must carry out an ambitious program of reforms. The proposal specifies nothing else, but it is plausible that Brussels will ask (and verify) the real implementation of the commitments of the National Recovery Plan: from the fight against tax evasion, to the opening of some sectors to competition, to the efficiency of administration and civil justice. A Rubik’s cube is at least as complex as the Stability Pact.

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