Duties, what does suspending the EU Stability Pact mean and how would Italy benefit?

Economy Minister Giancarlo Giorgetti called it a 'provocation', which nevertheless carries weight, because it falls in the midst of the consultations in the European Union at this time to deal with the offensive launched by Donald Trump with the duties. A possible way out to allow European countries to put in place substantial public interventions to support the production activities most affected by the duties could be the one already followed in 2020 to cope with the economic consequences of the pandemic: activate the general suspension clause of the Stability Pact. Is this actually a viable path? And what could be the benefits for our country?

Giorgetti in his speech at the Ambrosetti Forum on 6 April referred explicitly to the 'general escape clause' of the European Stability Pact in the event of an exceptional event leading to a severe economic recession. The case of the Covid fell fully into this category, so much so that the European Commission decided to activate the escape clause in March 2020 and the governments agreed to this. "The Finance Ministers of the EU Member States," reads the document circulated on 23 March 2020, "share the Commission's assessment expressed in its communication of 20 March 2020, that the conditions for invoking the general escape clause of the EU fiscal framework are met: a severe economic downturn in the euro area or in the Union as a whole. Recourse to the clause would have provided the 'necessary flexibility' to take all appropriate measures to support health and civil protection systems and protect European economies, 'including through additional discretionary stimulus measures and coordinated actions by member states designed to be timely, temporary and targeted, as appropriate'. The consequence was that European countries were authorised to resort to debt on several occasions to counteract the effects of the pandemic. The suspension of budgetary discipline, with attached deviations from the path of deficit containment towards the 3 per cent of GDP target and debt towards 60 per cent, lasted until 31 December 2023. Then, after arduous negotiations that saw the governments engaged in a heated confrontation over the text prepared by the Commission, an agreement was reached on the basis of which the very mechanism of the Stability Pact was reformed in several parts (with the entry of the new parameter on net expenditure, the forecast of an adjustment path whose projection is on a multi-year basis, in our case seven years), which is now in its first year of application.

The procedure put in place by Brussels only concerns defence spending for the time being, and in this case the national standstill clause has been activated, which allows the deficit ceiling to be exceeded by a maximum of 1.5% of GDP per year for each member state for a maximum of four years. The excessive deficit procedure remains unchanged, with the exceptions provided for defence. It is in detail Article 26 of the directive revising European economic governance that envisages precisely the activation of national escape clauses to deal with specific emergencies (in this case defence spending), which is a different matter from Article 25 (to which Giorgetti also referred), i.e. the general suspension clause that allows deviation from the path of public accounts recovery based on the net expenditure parameter. A clause that is activated (as it was for Covid) in the presence of a 'serious economic situation'/recession involving the eurozone or the entire European Union.

At the moment, according to the first informal reactions in Brussels, the conditions are not in place to put the general suspension of European budget constraints into action immediately. The European response to Donald Trump's tariffs is in the process of being defined, and analyses and simulations of the impact they might have on the economy of the Old Continent are underway. Should the conditions be met (i.e. in short, the economy sliding towards a severe contraction), it would be the EU Commission that would take charge of the proposal, which would then have to be shared by the governments. It is not ruled out in principle that this could be achieved, but caution prevails at the moment. The other path (which is also evoked by the government, albeit at a theoretical level) of a new revision of the newly reformed economic governance seems impossible at the moment.

Certainly the possible new suspension of the budget rules set out in the Stability Pact would open up margins available to the government to provide deficit support to the production sectors most affected by the duties. In substance, there would no longer be (for a period to be established) the obligation of a minimum structural adjustment equal to 1.5 per cent of GDP spread over seven years, as envisaged by the current budget discipline, and also for the debt there would be no return path that should be triggered when the infringement procedure for excessive deficit is terminated. More deficit in essence, not sanctioned by the Commission, as was the case for Covid. Budget margins widely used from 2020 onwards. Rather than go down this road (which in any case might meet with the objection of several European countries), and rather than chasing the path of repeated suspensions of European rules, it would be far preferable if the decision were taken to replicate for the combined defence and duties emergency the mechanism implemented with the Next Generation EU programme, in essence the issuing of joint debt by the Commission guaranteed by all the member countries in the form of both loans and subsidies to be allocated in proportion to the various countries. Germany might not oppose this, now that it has decided in a historic decision to revise the constitutional constraint on the debt 'brake', thus opening the way for defence and infrastructure investments of around 1 trillion.