Ideally, the Stability Pact could have been used to take integration further by establishing a common fiscal policy, with common revenues and expenditures, and a common industrial policy. Europe would definitely need an investment agency with a large budget to support strategic investments in the energy and digital transitions. Alternatively, the revised pact could have at least served to give member states a bit more breathing room, even by tying the issuance of new debt to strategic investments (so-called “good debt”) to discourage unproductive spending.
But instead, this opportunity has been squandered, all because of the so-called “austere” countries, headed by Germany. And it won’t be only the “Latin” countries – France, Spain, Italy (whose government is unbelievably timid on this issue) – who will suffer as a result, but also Germany, the Netherlands and the other countries that have chosen to sacrifice themselves on the altar of austerity.
What is the Stability Pact? The Stability and Growth Pact is the system of rules that limits public spending by European Union states. The pact, which was suspended on account of the pandemic, will go into effect once again on January 1, 2024 if no amendment can be agreed upon by then. Like many other European-level rules, this pact has been shaped by the principles of austerity and neoliberalism: it is no coincidence that everyone calls it the “Stability Pact,” leaving out the “growth” that should also be at the heart of the fiscal policies of the Union and its member states. Furthermore, the Pact has pro-cyclical effects, meaning that it adds the burden of austerity to a negative economic climate, as happened during the 2010 financial crisis, with very serious consequences for the peoples of Europe.
Since many countries have not yet repaid the debt they incurred to counter the economic effects of the pandemic, and because of the need to invest heavily in order to finance the energy and digital transitions, back in April the European Commission put forward a proposal to reform the Pact. The pressure to increase military spending by member countries in the context of the war between Russia and Ukraine also played a role. While maintaining the framework of rules enshrined in the Treaties, the Commission’s proposal aimed to abandon the current one-size-fits-all approach for all member states in favor of one that takes into account specific national circumstances.
Brussels proposed a four-year “fiscal adjustment path” for each member state that fails to meet one of the Maastricht criteria. The adjustment path could be extended by another three years if structural reforms or strategic investments are planned to stimulate growth.
However, Germany has been hostile to this reform from the beginning, since, according to Berlin, customizing the paths would undermine “fiscal discipline,” as they would be the result of bilateral negotiations between the member state and the Commission. In late April, German Economy Minister Lindner was already calling for “more binding rules.”
Since then, the legislative text has been revised several times, each time towards greater restrictions. The “Latin” countries, led by France, gave in on many fronts, for instance agreeing to reintroduce automatic debt and deficit reduction rules. But Germany now wants a country being subjected to the excessive deficit procedure to have no flexibility, even if it invests in defense or in the green transition.
In short: austerity as a political agenda for Europe. This was the contentious issue in Friday’s standoff, with the French unwilling to give in on this last point. But in the end, Germany knows it has the upper hand: if no agreement is reached, in a month’s time the old pro-austerity, anti-investment pact it loves so much will be back in force.
If an agreement is reached, the new pact could be put to the Parliament before the elections scheduled for June and enter into force in 2025. In the meantime, existing rules would be adjusted in anticipation of the new ones. However, at this point it’s clear that the final compromise won’t affect the bottom line of the pact at all – i.e., austerity – and will probably only end up giving states a modicum of flexibility for the one line item that everyone is focused on right now, whether Germany, France or Italy: military spending.