by Mish Shedlock, Mish Talk:
The EU never enforced its Growth and Stability Pact or Maastricht Treaty rules. The crisis is coming to a head with France and Italy in the spotlight. The first casualty will be Green policy.
Compliance Rules
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Deficit Disaster Zones
France and Italy are major disasters right now on the budget deficit rule. France has a budget deficit of 7 percent and Italy 5 percent.
France needs to reduce its deficit by a whopping 4 percent of GDP!
Neither Italy nor Greece should have been allowed in the EMU (European Monetary Union – Eurozone) in the first place.
Greece has a debt-to-GDP ratio of 170 percent. The target is 60 percent.
But the lead chart tells the picture. Only the Scandinavian countries are in compliance.
Looser Rules Postpone the Crisis
On February 10, the EU agreed to Looser Fiscal Rules to Cut Debt, Boost Investments.
The latest revamp of two-decades-old rules known as the Stability and Growth Pact came after some EU countries racked up record high debt as they increased spending to help their economies recover from the pandemic, and as the bloc announced ambitious green, industrial and defense goals.
The revised rules allow countries with excessive borrowing to reduce their debt on average by 1% per year if it is above 90% of gross domestic product (GDP), and by 0.5% per year on average if the debt pile is between 60% and 90% of GDP.
Countries with a deficit above 3% of GDP are required to halve this to 1.5% during periods of growth, creating a safety buffer for tough times ahead.
Defense spending will be taken into account when the Commission assesses a country’s high deficit, a consideration triggered by Russia’s invasion of Ukraine.
The new rules give countries seven years, up from four previously, to cut debt and deficit starting from 2025.
Note that the EU can tweak enforcement but not the baseline Stability and Growth Pact targets themselves without unanimous agreement, and a new treaty.