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

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  • Claudia Ciccone

    (Roma Tre University.)

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.

Suggested Citation

  • Claudia Ciccone, 2025. "Will the New European Fiscal Rules Raise the Debt-to-GDP Ratio? An Analysis of the Italian Case," Working Papers Series inetwp243, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp243
    DOI: 10.36687/inetwp243
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    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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