Stockholm Christian Lindner appeared in good spirits in front of the cameras in the conference center at Stockholm Airport. He was once again the center of attention at the meeting of EU finance ministers after declaring the EU Commission’s draft law on the reform of the Stability Pact to be insufficient this week.
The German finance minister was asked by a journalist whether he enjoys playing the hardliner. Lindner denied this assessment. He was “always upbeat, friendly and polite,” he said. “That’s my mood today.”
On Friday, the 27 finance ministers had their first opportunity to talk personally about the Commission’s reform proposals. The topic was not officially on the agenda, but the reform of the Stability and Growth Pact dominated the sideline talks.
The Commission presented its draft law on the new debt rules on Wednesday, and the familiar camps formed immediately. Lindner, the rules were not strict enough. His colleagues from France and Italy countered that the German demands went too far.
France’s Finance Minister Bruno Le Maire publicly accused Lindner on Friday of “introducing old and inefficient ideas through the back door”. One has to acknowledge the new reality that some member states have national debts that are more than 100 percent of gross national product and others are below 60 percent, he said. That is why the Commission’s proposal to agree on country-specific debt reduction plans is correct.
The ministers want to find a compromise by the end of the year. Then the stability pact should come into force again in a reformed form, after it had been suspended since the beginning of the corona pandemic in March 2020. The reform is about the question of how quickly the states have to reduce their debt levels to the permitted mark of 60 percent of economic power.
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In view of the high debt levels after the pandemic, the Commission wants to give the states more leeway. There are fears that austerity measures that are too severe could plunge some heavily indebted countries into recession. The authority therefore wants to agree a tailor-made four-year debt reduction plan with each country that takes into account the national economic characteristics. Lindner, on the other hand, insists on a minimum of uniform, measurable rules for everyone.
Lindner’s demand that highly indebted countries have to reduce their debt ratio by at least one percent every year was not included in the draft law. Instead, the Commission has only proposed that states must reduce their deficits by 0.5 percentage points per year if they exceed the 3% limit.
This concession is not enough for Lindner, he calls for further tightening. The draft is “just a first step,” he said in Stockholm. It contains “positive signals in the direction of the German position”, but further additions are necessary.
Lindner: Shouldn’t feed inflation any further
Several finance ministers welcomed the fact that there was finally a concrete draft law on which to negotiate. “It’s a good start for negotiations when everyone is a little dissatisfied,” said Swedish Finance Minister Elisabeth Svantesson, who currently holds the Council presidency.
Spanish Finance Minister Nadia Calvino, who will take over the Council Presidency in the second half of the year, also spread confidence. “The aim of finance ministers is to reach an agreement this year,” she said. “We will do everything to achieve this goal.”
But there are serious doubts about the timetable, so serious are the differences of opinion. The financial policy “hawks”, led by Lindner, insist on more uniform guidelines for debt reduction. The governments would have to get down from their high spending, said the FDP leader. You shouldn’t feed inflation any further.
Le Maire, on the other hand, argued that any rigid annual reduction target went against the spirit of the reform. After all, the basic idea is to differentiate the specifications nationally. “We are strictly against any automatic rule for debt or deficit reduction,” he said. Such would be “not efficient”.
In Parisian government circles it was said that the deficit rule enforced by Lindner should at most be a “guard rail”. “It must not apply in all situations.”
IMF Europe boss warns finance minister to save
The Europe Director of the International Monetary Fund (IMF), Alfred Kammer, welcomed the thrust of the reform. The Commission’s draft contains many elements that the IMF had called for, he said in Stockholm. These included country-specific debt reduction paths.
Kammer did not want to comment on the content of Lindner’s requests for improvement. In the end, the rules would have to be supported by all member states, he said diplomatically. The most important thing is to decide on the reform now by the end of the year.
Chamber also warned the finance ministers to consolidate their budgets more. Fiscal policy must become more restrictive in order not to fuel inflation further. So far, the states have not lived up to expectations. Fighting inflation must have top priority, said the IMF man.
EU Commission Vice President Valdis Dombrovskis defended the Commission’s proposal. It is a balanced draft that has been preceded by long consultations, he said. The finance ministers now have to deal with it constructively. The deadline for the end of the year is “ambitious”. His colleague, Economics Commissioner Paolo Gentiloni, said there was enough time if everyone got seriously involved.
What happens if there is no agreement?
Lindner emphasized that he was not the only one standing in the way of the reform. “Others, I’m thinking of the Italian colleagues, have concerns from a different perspective,” he said. If a good solution could be reached quickly, that would be “even better”. But: “As long as we don’t have new rules, the old ones apply.”
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Formally, Lindner is right. However, the problem in the past was that the old debt rules were not enforced. Christine Lagarde, President of the European Central Bank (ECB), therefore pointed out that she had not heard from any participant that a return to the old rules would be desirable.
Her compatriot Le Maire was even clearer: “We don’t want to go back to the old rules. They will not be effective in the new world,” he said.
The Commission has already announced that it intends to give lenient assessments to government budgets for 2024. The Stability Pact gives it a certain amount of discretion. From the Commission’s point of view, it would therefore also be in Germany’s interest to quickly adopt new rules that are easier to enforce.
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