Will the New European Fiscal Rules Raise the Debt-to-GDP Ratio? An Analysis of the Italian Case

Claudia Ciccone
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Claudia Ciccone: Roma Tre University.

No inetwp243, Working Papers Series from Institute for New Economic Thinking

Abstract: The recent reform of the European fiscal governance framework has been portrayed as a break with the austerity logic of the past. Yet its core logic remains largely unchanged. This paper investigates the possible effects of the fiscal consolidations required under the new European fiscal rules on Italy's debt-to-GDP ratio. Drawing on the reference trajectory for net primary expenditure transmitted by the European Commission to Italy in June 2024, the analysis shows that the projected decline in the debt-to-GDP ratio relies on an assumption for which the Commission gives no justification: that the contractionary effects of fiscal consolidation on GDP are only temporary and fully dissipate three years after the adjustment period. Once this assumption is removed and the effects of consolidation are allowed to persist - as suggested by empirical evidence on hysteresis - GDP growth weakens substantially, and the debt-to-GDP ratio may increase rather than decrease. The findings suggest that the new governance framework may lead to the pro-cyclical tightening, weaker growth and adverse debt dynamics that characterized earlier phases of EU fiscal governance.

Keywords: Fiscal policy; European economic governance; Debt sustainability; Fiscal consolidation; Net primary expenditure; Potential Output; Output gap; Fiscal multipliers; Austerity. (search for similar items in EconPapers)
JEL-codes: E02 E32 E6 E62 F42 H61 H62 H63 H68 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2025-11-19
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp243

DOI: 10.36687/inetwp243

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