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The European Commission has made proposals for the reform of the Stability and Growth Pact. These reform ideas are an admission that eurozone debt rules have failed. The current rules stipulate that the euro states should not be in debt for more than 60 percent of their economic output and that they can incur new debts of a maximum of three percent of their economic output every year.
Monetary union is a long way from that. Only three states are complying with both rules this year. After the financial crisis and Corona aid, the average debt is around 95 percent. The rules are currently suspended for four years due to Corona, the Ukraine war and the energy crisis. However, if they came into force unchanged as planned from 2024, almost no country would fulfill them.
The old Stabilization Pact is de facto outdated, also because it now overwhelms many countries. So far, over-indebted states have had to reduce their liabilities to below 60 percent within 20 years. This requirement is considered too demanding for Italy or Greece; the necessary savings as too high a burden. The Commission is therefore now proposing to give highly indebted countries more time. Although the liabilities should decrease in the long term, but slowly and socially acceptable and in such a way that the governments can continue to invest, especially in the energy transition.
However, the debt ceiling is now only a distant ideal. By admitting that some states will not be able to reach this value even in twenty years, politicians are implicitly giving up. It is also the official end of the austerity policy pursued by the EU during the euro crisis, which calls for tough austerity measures to stabilize public finances.
Over-indebted member states should in future commit themselves to individual debt reduction packages: They should be given more time if they promise growth reforms and investments. That can work, but only if the negotiations are not left to the Commission and the EU governments as planned. The latter are responsible for the failure of the debt pact. The new debt rules must be overseen by a truly independent institution with the power to impose severe sanctions. Otherwise the Stabilization Pact 2.0 is worthless.
