Hatzidakis: “Greece has entered a new path”
Europe may have been delayed, but it finally managed to find the “golden ratio” in order to move on revision of the European economic governance framework also known as Stability Pact.
The positions-aspirations of the Greek side in this multi-month negotiation were to a very large extent satisfiedwhich makes the Ministry of National Economy and Finance declare itself completely satisfied, while at the same time it gains more flexibility in the way it implements policy.
THE Kostis Hatzidakis states characteristics “Greece has entered a new path and our decision is to seriously continue our work, so that the Greek economy in 2024 rises even higher!”.
Greece has every reason to feel vindicated, since in one plus two key points it won what it sought.
The first has to do with the new rules the rate of annual debt reduction is significantly limited. With the existing framework, each member state with a debt that exceeds the limit of 60% of GDP should reduce it every year by 1/20 of the excess amount. This means for Greece, that while today the annual debt reduction is in the range of 4% to 5%, based on the new rules that will be implemented from 2025 the requirement for the average annual debt reduction drops to 1% . Over the last three years, Greece has been reducing its debt-to-GDP ratio by more than ten points per year.
At the same time, the two additional points of the decision concerning Greece are the following:
– In the event that a member state has higher investments in defense than the European average, or makes a significant increase in its investments in defense, the possibility is introduced that these expenditures are not taken into account for the inclusion or non-adherence of the state member in Excessive Deficit Procedure. Defense investment is the only category of expenditure for which this provision is expressly introduced.
-It is ensured that the interest of official loans is included in the public debtwhich is scheduled for 2033, will not be taken into account in the evolution calculations of the Greek public debt regarding the application of the new fiscal rules.
Details of what the agreement provides:
1. Special treatment of defense investments
The new fiscal rules provide that when the deficit and debt limits are exceeded, it will be taken into account whether it is due to high spending on defense investment. This practically means that if a member state has higher investments in defense than the European average, or makes a significant increase in its investments in defense, it is possible that these costs are not taken into account for its accession or not Member State in Excessive Deficit Procedure. Thus, defense investments can for the first time function as a category of expenditure that will be excluded from the calculation of the (excessive) deficit. Defense investment is the only category of expenditure for which this provision is expressly introduced.
2. Gradual reduction of deficits and debt
With the existing rules, each member state that has a debt of more than 60% of GDP is obliged to reduce its debt by 1/20 of the excess amount every year. In practice, this for Greece means an annual debt reduction of 4.5%-5% in the coming years. With the new rules, the required debt reduction will be calculated based on the characteristics of each member state, while the minimum threshold for states with high debt (>90% of GDP) such as Greece is the annual average debt reduction of 1%. It is noted that in the last three years (2021-2023) Greece is reducing the debt-to-GDP ratio by more than ten points per year. For states with debt between 60% and 90% the minimum average required reduction rate is 0.5%. With the abolition of the 1/20 rule, the requirements to limit the public debt in the following years will therefore be significantly reduced.
In addition, the new fiscal rules reduce the minimum requirements for limiting fiscal deficits. In particular, both the existing and the new rules provide that states should generally set fiscal deficit targets that are more ambitious than the 3% ceiling set by the Treaty. Their purpose is to ensure that even in times of economic crisis, when the deficit is actually higher, the Member States will manage to fulfill their obligations. In the existing context, there are two such upper limits which in the case of Greece entail a maximum deficit equal to 0.5% of GDP and 0.7% of GDP respectively. Under the new rules, the above limits are abolished and replaced by a single and less stringent deficit ceiling, which stipulates that the deficit should not exceed 1.5% of GDP.
3. National ownership and medium-term planning
With the new system we return to a less horizontal architecture based on individual four-year national fiscal adjustment plans. These Plans should, of course, follow the agreed common rules, while the European Commission will issue for each state a technical proposal (“technical trajectory”) for the evolution of the variable that will be the focus of the fiscal adjustment, namely net primary public expenditure. The Commission’s proposal will form the basis of discussion for making final decisions. Each state will be able to propose its own fiscal adjustment proposal, taking into account the particular circumstances it faces. It is even explicitly recognized that the course of development of public expenditure may deviate from that proposed by the European Commission as long as this is sufficiently documented. This procedure is analogous to that of the approval of the national recovery and resilience plans implemented under the NextGenEU programme. Thus, national ownership of fiscal adjustment plans is significantly increased.
It also recognizes the possibility of revising the four-year plans before their completion, either in the event of a change of government or when changes occur that make their implementation impossible. In this way, on the one hand, the right of the democratically elected governments to incorporate their own economic priorities into the Adjustment Plans is recognized, while respecting the general framework of the agreed rules, while at the same time it is ensured that when unforeseen events occur, the states will not be bound by outdated plans.
4. Protection of pro-development investments
The new fiscal rules create more fiscal space to make investments that are developmental in nature and contribute to addressing contemporary challenges such as the digital and green transition, tackling the climate crisis, energy security, economic resilience, social cohesion and defence. . This does not mean completely excluding them from the calculation of the deficit and the debt. Such a thing would not be possible, given that these expenses would eventually have to be paid from somewhere. However, states that commit to a set of reforms and investments will be able to request a longer adjustment period (up to 7 instead of 4 years) in order to achieve their fiscal targets.
5. Escape clauses
The new framework explicitly recognizes the possibility of deviations from the provisions of the four-year Adjustment Plans, either in the event of a severe economic recession in the euro area or the EU (“General Clause”), or in exceptional circumstances beyond the control of the national governments and have a significant impact on their public finances (“special clause”). The decision will be taken by the Council of Ministers following a proposal from the European Commission. Particularly important is the fact that with regard to the special clauses it is recognized that the initiative to start the procedure will be given to the member states who will submit a relevant request to the European Commission (it turned out to be a request of Greece that was accepted).
