How Christian Lindner wants to save the European debt rules

Helsinki Things are not going well for FDP leader Christian Lindner. Exactly the second the finance minister entered the government plane on Wednesday morning, all the lights went out. The technology fails. That, the captain announces, has really never happened before.

Lindner smiles at the little incident and stomps through the plane in a good mood. The technology works again, the plane to Helsinki takes off. There, Lindner meets his colleague Annika Saarikko, an ally in the fight for solid state finances in Europe.

After he, of all people, had to incur record debts as a liberal finance minister during the energy crisis, Lindner wants to flip the financial policy switch this year. At home he wants to comply with the debt brake. And prevent unrestrained debt accumulation in Europe.

If no reform is in place by the end of the year, the EU debt rules will come into force again in unchanged form on January 1, 2024. For highly indebted member states, this would mean a sharp austerity course, which not even advocates of a strict austerity policy consider sensible. The rules have been suspended since the beginning of the pandemic, most recently the exemption due to the Ukraine war was extended until the end of 2023.

The time to initiate a reform is therefore pressing. But the EU countries are a long way from a compromise. A group of heavily indebted countries, led by Italy, want maximum flexibility in reducing debt. Other governments, above all Germany and Austria, warn against relaxing the rules.

In order to strengthen the resistance front, Lindner embarked on a kind of “road show” through Europe this week. On Tuesday he visited the Dutch Minister of Finance, on Thursday Lindner will travel to Vienna to see his Austrian colleague. And in between the trip to Helsinki.

Lindner’s road show is a signal to Brussels

Lindner knows that Finland is on his side in the fight against a relaxation of the debt rules. The Finnish finance minister is one of the few in the euro group who insists on financial discipline even harder than Lindner. Lindner praises his colleague as a “strong voice” for stable state finances.

Conversely, Lindner received a friendly welcome in Helsinki. The streets of the Finnish capital are blocked especially for him, rather unusual for a finance minister.

Lindner’s visit is a signal: The countries of Northern Europe stand together in their fight for robust EU debt rules. However, Lindner does not want to speak in front of a new alliance of stability-oriented states, as there used to be. Germany is looking for solutions “that fit all states”.

Christian Lindner

The Federal Minister of Finance is critical of the EU Commission’s reform proposals for debt rules.

(Photo: IMAGO/Lehtikuva)

From Lindner’s point of view, however, the reform proposals of the EU Commission are not suitable. The Stability Pact stipulates how much debt the EU states can incur: no more than three percent of gross domestic product per year, no more than 60 percent of the economy as a whole.

>> Read here: What the new EU debt rules look like and what concerns there are

Due to the many crises, however, the debt levels of many EU countries have risen to more than 100 percent, making the debt ceiling obsolete. If Italy had to comply with the debt ceiling within 20 years, as is now prescribed, the country would have to save so much that, in the worst case, there could be social unrest.

Lindner is therefore ready to tackle this so-called “one-twentieth rule”. The finance minister also admits that the previous debt rules have not worked. Portugal has managed to consolidate, while France’s debt level has risen despite the same economic environment. A reform is therefore inevitable.

Lindner rejects more power for Brussels

From Lindner’s point of view, the EU reform proposals mean too much power for Brussels. According to the Commission, each country should in future agree a tailor-made, multi-year debt reduction plan with Brussels.

Over-indebted countries must achieve a sustainable reduction path within four years, which can be extended to seven years. A deviation would trigger an excessive deficit procedure, placing a country under the Commission’s heightened oversight.

Lindner fears that the agreements between Member States and the Commission could be too generous. The EU Commission’s proposed debt analysis is “full of political assumptions,” says Lindner in Helsinki. “There must be no special paths for individual states.”

The debt situation in Europe has eased at the moment. The high inflation is causing debt levels to fall, and the countries spend relatively little on debt servicing in relation to their economic power.

>> Read here: Dispute over new debt fund – the EU still has that much money in reserve

However, as a result of high inflation, governments will have to spend significantly more on debt service over time, warns Lindner. For him it is conceivable “to make the timetable for debt reduction more flexible, but not the direction of debt reduction”.

Objection came immediately. Former IMF chief economist Olivier Blanchard tweeted that economic differences between countries cannot be ignored. Anyone who does like Lindner “generates the same mistakes as with the existing rules” – and renders them ineffective. Lindner rejected the criticism. Numerical rules created more ambiguity and uncertainty, including in the financial markets. That’s why you need clear rules for everyone.

Lindner once introduced himself to his European counterparts as a “friendly hawk”. In Helsinki, too, he digs out the self-description. In the debate about the reform of the EU debt rules, however, the friendliness on all sides should soon be over.

More: Reform of EU debt rules threatens to fail

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