Federal government draws red lines when reforming EU debt rules

Berlin The debate about reforming the EU debt rules is heating up. While the EU Commission wants to quickly pour its proposals into a draft law, Federal Finance Minister Christian Lindner (FDP) is slowing down. In his view, Brussels’ reform proposals are a major softening of the previous debt rules.

Lindner has now submitted the position of the federal government to the EU Commission in a so-called “non-paper”. In the three-page paper, Lindner draws red lines and introduces his own reform proposals into the debate – which are unlikely to meet with much enthusiasm in parts of Europe.

A reform of the EU rules has become necessary because the debt levels of many EU countries have meanwhile risen far beyond the actually permitted level as a result of the many crises in recent years. If the existing rules were to continue to be applied, some countries would have to pursue such a brutal austerity course that even supporters of fiscal austerity consider wrong.

The EU Commission has therefore developed a reform. However, Lindner thinks little of that. “The Commission’s proposals so far are inadequate,” says the Federal Ministry of Finance.

According to Brussels, the EU Commission should in future agree a tailor-made, multi-year debt reduction plan with each EU country. Its specifications vary in severity, depending on how heavily indebted the country is.

According to the Federal Ministry of Finance, the Commission’s approach does not guarantee “an adequate reduction in public debt in Europe”.

>> Read more: The dispute over the EU debt rules is getting fiercer

Lindner fears that such bilateral negotiations would overly politicize European debt rules. “The consolidation of budgets is not a matter for negotiation,” says Lindner’s house. “Proposals pointing towards a softening of the Stability and Growth Pact cannot be accepted”.

The EU needs debt rules “that apply equally to all member states,” according to the Federal Ministry of Finance. This is also important as a signal to the financial markets. In the letter, Lindner therefore urges a “simple and transparent spending rule” and “concrete safeguards”.

As a basic requirement, Lindner accepts that expenditure should increase more slowly than potential growth. The core of Lindner’s reform proposals, however, are “common guidelines to ensure adequate debt reduction”.

Tougher requirements for highly indebted countries

The federal government’s proposal: Highly indebted countries should in future reduce their debt ratios by at least one percentage point a year and countries with average debt ratios of more than 60 percent should reduce their debt ratios by at least 0.5 percentage points a year until the ratio is no longer above 60 percent – which is the debt ceiling of the current debt rules.

Compared to the rules that are now in force, Lindner is also reducing the claims. According to this, a highly indebted country like Italy would have to save significantly more than the federal government’s plans envisage. Lindner insists on more commitment. According to the Federal Ministry of Finance, the debt regulations should “not remain a toothless tiger”.

In the past, EU countries had repeatedly violated the debt rules, but were never sanctioned for this, including Germany. The enforcement of the rules is crucial, however, and an effective deficit procedure is “essential” in the event of deficit overruns, according to the Federal Ministry of Finance. If a country breaks the debt ceiling of three percent a year, an deficit procedure must be opened.

As a further safeguard, the federal government is pushing for a revision clause. If the new rules do not bring about the desired debt reduction within four years, the set of rules should be revised automatically.

Federal government takes a step towards Brussels

In one point, Lindner also takes a step towards the EU Commission. “Special incentives could be created” for spending on climate protection and digitization, which means that spending on this may not be fully counted towards the debt rules.

Lindner is not only accommodating the EU Commission, but is also making a concession to Economics Minister Robert Habeck (Greens). This point was very important to him, according to government circles. Lindner himself sees this exception rather critically.

Lindner could also have “imagined further proposals” on other issues, according to finance ministry circles. The joint position of the federal government “however, already represents a significant tightening and fundamental change compared to the position of the EU Commission.” At the same time, it was possible to formulate clear conditions without going to extremes.

According to government officials, the compromise is therefore a success for another reason. It is also a sign that the traffic light is still able to silently find a common line when it comes to sensitive political issues.

More: Lack of coordination – the chaos in the federal government is causing trouble in Brussels

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