EU Commission reprimands German budgetary policy

Paolo Gentiloni

EU Monetary Affairs Commissioner Paolo Gentiloni said in Strasbourg on Tuesday that the draft national budgets presented a “mixed picture”.

(Photo: Reuters)

Brussels The European Commission has evaluated the budget plans of the euro countries for 2023 – and still sees some room for improvement. In particular, she calls on governments to better target energy aid to needy households and businesses.

According to the authority, Germany is one of the ten countries that will have an expansive fiscal policy in 2023 and thus increase aggregate demand. The others are Portugal, Belgium, Austria, the Netherlands, Luxembourg, Lithuania, Latvia, Slovenia and Slovakia.

The German willingness to spend is manifested, among other things, in the “double boom”, as Federal Chancellor Olaf Scholz called the latest relief package. The package envisages energy aid of up to 200 billion euros by 2024.

EU Monetary Affairs Commissioner Paolo Gentiloni said in Strasbourg on Tuesday that the draft national budgets presented a “mixed picture”. It is good that all governments in the euro zone are investing in the green transition of the economy and energy security. But most energy packets failed to be targeted.

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According to the Commission, less than 30 percent of the aid is specifically aimed at needy households and companies. Therefore, some budget drafts urgently need to be revised, said Gentiloni.

In a European comparison, German aid is in the upper midfield

Behind this is the concern that the governments with their billions in spending will stimulate demand according to the watering can principle and thus fuel the high inflation. This in turn makes it more difficult for the European Central Bank (ECB) to bring inflation back down to the long-term target of two percent. The central bank has been trying for months to dampen demand by raising interest rates.

EU countries

The EU Commission has taken a close look at the finances of the member states.

(Photo: dpa)

EU Commission Deputy Valdis Dombrovskis said: “Since we are fighting inflation, we must ensure that fiscal policy does not contradict monetary policy.” It is therefore important to coordinate energy policy measures. In the Eurogroup, the finance ministers have already committed themselves to a neutral fiscal policy on several occasions. But they seem to find it difficult to keep up.

According to the Commission, the relief packages this year correspond to 1.25 percent of gross domestic product (GDP). In 2023, she estimates spending at one percent of GDP. However, this value could rise to two percent if energy measures, which should expire in the course of the year, are extended until the end of 2023. Given this uncertainty, “there is a risk that fiscal policy will be more expansionary than expected,” the Commission warns.

>> Read here here: It’s too early for another debt fund

In terms of GDP, German aid is in the upper middle range in a European comparison. Scholz also points this out when he rejects the partners’ criticism of the supposedly oversized “double boom”. For example, Italy, Spain, Poland and the Netherlands are spending more in percentage terms than the federal government this year. In the coming year, however, Germany will be well above the average.

mismatch in Berlin

Above all, there is a clear mismatch between targeted and untargeted aid in Berlin: Targeted aid would account for 0.1 percent of GDP in 2023, an EU official explains. On the other hand, untargeted aid, which is considered a potential driver of inflation, is significantly larger at 1.7 percent of GDP.

>> Read here here: “Biggest Destroyer of Wealth” – Bundesbank raises inflation forecast for 2023

Economists are also skeptical about budget planning in the euro zone. At an event in Brussels on Monday, Michael Hüther, head of the employer-related Institute of German Economics (IW), criticized that fiscal policy was not being coordinated. In particular, the German relief package is viewed negatively by the partners.

Criticism is also stirring in the ECB. “The last thing the euro zone needs is a boost in demand,” said Fédéric Holm-Hadulla, head of policy assessment. It is therefore important that the energy aid is targeted.

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