EU agrees to long-delayed reform of tax rules – 02/10/2024 – Market

The European Union has agreed to a long-delayed overhaul of its fiscal rules in a move that economists say will usher in an era of tighter budgets even as European growth prospects are set to weaken.

After weeks of negotiations, EU negotiators on behalf of governments and the European Parliament agreed this Saturday (10) to set annual targets for reducing public debt and limits on public spending — a key demand from Germany.

The compromise gives treasuries more room for public investment, allowing countries to reduce excessive debt at a slower pace over four to seven years. Furthermore, in a nod to France and Italy, several exemptions allow for a more gradual tightening of the public purse.

The agreement comes after the so-called Stability and Growth Pact, which limits public deficits to 3% of Gross Domestic Product and national debt to 60% of GDP, was suspended over the last four years to allow countries to recover from the pandemic. and cushion the impact of Russia’s invasion of Ukraine — with debts and deficits rising across the bloc.

Economists agree that reformed fiscal rules will lead governments to progressively reduce spending, affecting the region’s economy.

After expanding at a weak 0.5% in 2023, the euro zone is expected to grow 0.8% this year, according to the European Central Bank. The European Commission will likely revise its own growth estimates for 2024 downward next week.

Dani Stoilova, an economist at French bank BNP Paribas, estimated that the new fiscal requirements would shave about 0.1 to 0.2 percentage points off GDP over the next two years.

Spain, the euro zone’s fourth-largest economy, would have to make the biggest additional fiscal tightening of the bloc’s biggest members under the new rules, reducing its structural primary deficit by 1 percentage point of GDP more than planned in 2025 , according to an estimate from BNP Paribas.

The rules will have little impact in Germany, Europe’s biggest economy, where a recent constitutional court ruling on national budget rules has forced the government to further reduce its planned spending.

France has failed to achieve a surplus in its primary budget excluding interest costs since 2008, and rating agency S&P Global predicted this week that in this regard its deficit will remain one of the biggest in the euro zone for the next three years. years. Morgan Stanley recently estimated that France is the least likely of the eurozone’s four biggest economies to meet the targets set by the new rules.

Italy, which has the highest debt burden among the main euro zone economies, will also have difficulty reducing it, according to economists at Morgan Stanley.

“Italy has historically recorded primary surpluses, but its ability to achieve the necessary adjustment is not guaranteed, in a context where it has to pay high interest expenses,” they recently wrote in a note to clients.

Overall, the consensus view is that the rules are more demanding than the status quo, but more flexible than the old framework that was suspended in 2020 and which has not been applied consistently.

“The risk with the new rules is that they fail at the first hurdle, compelling a level of fiscal adjustment that is counterproductive to the growth and strategic challenges the EU is facing,” said Mujtaba Rahman, managing director for Europe at Eurasia Group .

Much will depend on the degree of flexibility with which the commission will apply the new rules, which will come into force from 2025.

“This final agreement is not the pact of my dreams, it is different from the commission’s proposals, especially because it is much more complicated,” said Paolo Gentiloni, EU economics commissioner, whose original proposal was the basis for the final framework.

“But when we make that decision, we must be very serious about the fact that we need to implement it and enforce it.”