Europe: Strengthening Fiscal Laws Against the Background of Economic Deceleration
2023-10-09
■ The spread between Italian treasury bonds and German treasury bonds has widened due to concerns about the expansion of the fiscal deficit.
■ The EU plans to strengthen fiscal discipline starting in 2024, which may become one of the factors inhibiting the economy.
The spread between the Italian treasury bonds and German treasury bonds is widening. The reason for this is that the Italian government updated its economic and financial documents on September 27 against the background of a sharp rise in the interest rate of treasury bonds, raising the fiscal deficit forecast for 2023-26 from the level in April. This has led to its fiscal deficit (relative to nominal GDP) deviating from the 3% standard set by the European Union (EU).
Due to the sharp increase in public debt caused by the response to the pandemic and Ukraine's post-conflict energy price support policies, the European Union plans to strengthen fiscal discipline starting in 2024. The European Commission, the policy-implementing agency of the EU, released a fiscal law reform bill in April aimed at improving the sustainability of public debt. The bill continues to follow an agreement called the (Stability and Growth Pact), which requires eurozone member states to limit their fiscal deficits for a single fiscal year to less than 3% of nominal GDP and government debt to less than 60% of nominal GDP. It also requires countries that do not meet the conditions to propose plans for sustained public debt reduction and level reduction in their medium-term fiscal plans. Although a four-year plan period of up to 7 years is allowed to be extended in certain aspects, fiscal management will be subject to stricter restrictions starting in 2024.
Euro-zone member states must submit their next annual budget to the European Commission before October 15 each year and have it reviewed by the European Commission before the end of November. The Italian government plans to maintain a fiscal deficit of over 3% of nominal GDP by 2025, while in 2026, they plan to reduce the fiscal deficit (compared to nominal GDP) to below 3%. The judgment of the European Commission on the upcoming budget submission is highly anticipated in the future. The fiscal deficit in 2024 was affected by the government's promised tax reduction policies. If the European Commission requests modifications, the Italian government may have to make compromises on a part of government policy, which may lead to a decrease in the support of the Meloni government.
European countries are facing the challenge of economic slowdown, and in the future, fiscal factors may have an impact on suppressing the economy. In order to achieve economic stability, besides Italy, other EU member states also plan to maintain fiscal deficits at a nominal GDP ratio of over 3%. Overemphasizing fiscal discipline may have an impact on multiple areas such as long-term economic stagnation and depletion of political capital by governments (mainly due to a decline in government support rates). Therefore, how to balance social and economic stability and fiscal health will affect the direction of the European economy.
■ The EU plans to strengthen fiscal discipline starting in 2024, which may become one of the factors inhibiting the economy.
The spread between the Italian treasury bonds and German treasury bonds is widening. The reason for this is that the Italian government updated its economic and financial documents on September 27 against the background of a sharp rise in the interest rate of treasury bonds, raising the fiscal deficit forecast for 2023-26 from the level in April. This has led to its fiscal deficit (relative to nominal GDP) deviating from the 3% standard set by the European Union (EU).
Due to the sharp increase in public debt caused by the response to the pandemic and Ukraine's post-conflict energy price support policies, the European Union plans to strengthen fiscal discipline starting in 2024. The European Commission, the policy-implementing agency of the EU, released a fiscal law reform bill in April aimed at improving the sustainability of public debt. The bill continues to follow an agreement called the (Stability and Growth Pact), which requires eurozone member states to limit their fiscal deficits for a single fiscal year to less than 3% of nominal GDP and government debt to less than 60% of nominal GDP. It also requires countries that do not meet the conditions to propose plans for sustained public debt reduction and level reduction in their medium-term fiscal plans. Although a four-year plan period of up to 7 years is allowed to be extended in certain aspects, fiscal management will be subject to stricter restrictions starting in 2024.
Euro-zone member states must submit their next annual budget to the European Commission before October 15 each year and have it reviewed by the European Commission before the end of November. The Italian government plans to maintain a fiscal deficit of over 3% of nominal GDP by 2025, while in 2026, they plan to reduce the fiscal deficit (compared to nominal GDP) to below 3%. The judgment of the European Commission on the upcoming budget submission is highly anticipated in the future. The fiscal deficit in 2024 was affected by the government's promised tax reduction policies. If the European Commission requests modifications, the Italian government may have to make compromises on a part of government policy, which may lead to a decrease in the support of the Meloni government.
European countries are facing the challenge of economic slowdown, and in the future, fiscal factors may have an impact on suppressing the economy. In order to achieve economic stability, besides Italy, other EU member states also plan to maintain fiscal deficits at a nominal GDP ratio of over 3%. Overemphasizing fiscal discipline may have an impact on multiple areas such as long-term economic stagnation and depletion of political capital by governments (mainly due to a decline in government support rates). Therefore, how to balance social and economic stability and fiscal health will affect the direction of the European economy.