Economic debates in Europe are currently very focused on the consequences of the war in Ukraine, the possible embargo on Russian energy and high levels of inflation, which will lead to higher interest rates from the middle of this year. But these urgencies should not make us forget another previous problem, a consequence in part of the pandemic: the high levels of public debt accumulated since 2020 and the need to reduce it. This brings us to the debate on the fiscal rules of the national accounts, beyond the fact that Europe approves common financing instruments to face the great strategic challenges that lie ahead.
The public debt of the eurozone grew from 85% to 96% of GDP between 2019 and 2021, but the heterogeneity by country and the levels are very high in some of them. It is true that the governments are presenting their stability plans in Brussels, with ambitious reduction targets, aided by the recovery that, for the time being, is still under way, by high levels of inflation that are expanding nominal GDP, and by interest rates long-term interest rates that, despite being on the rise, are still low and will take time to transfer to the average cost of debt. Thus, Italy’s public debt should drop from 151% of GDP to 141% in 2025 according to official plans, and Spain’s would go from 118% to 110%.
In parallel to these plans, the European Union has resumed a consultation launched at the beginning of 2020 for the reform of the Stability and Growth Pact (SGP), which was postponed during the pandemic. The SGP is routinely criticized for being too complex, based on concepts that are not directly observable (such as structural deficits) and, in recent years, for generating abrupt budget adjustments in times of recession. At the moment its application is suspended due to the exceptional circumstance of the pandemic, and it may not be resumed until 2024.
Meanwhile, the proposals on the table from different institutions or think tanks In general, they point to different versions of a spending rule —that the ratio of spending to GDP cannot be increased unless it is financed with taxes—, which has the advantage of transparency and would allow the path of reduction to be smoothed in the first years of debt from current high levels, as well as ensuring prudent fiscal policy during expansions. The debate will take shape in the coming months and will be an opportunity to clarify positions on fiscal rules that, with their exceptions and political interference, have generated a lot of mistrust between European countries in recent years.
Miguel Jimenez Gonzalez-Anleo Y Javier Castro Sotelofrom BBVA Research.
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