Berlin, Brussels Christian Lindner has reawakened a sluggish debate. With the proposals for a reform of the European Stability and Growth Pact, which the Federal Finance Minister presented in an interview with the Handelsblatt on Wednesday, a first step towards renewal has been taken. But how the EU debt rules will be handled has not yet been clarified. “There’s still a big debate coming up,” said SPD MEP René Repasi.
In a nutshell, Lindner’s proposal looks like this: He wants to keep the central debt limits and make them a little more flexible; However, the rules should become more binding, especially when it comes to enforcement.
The Stability and Growth Pact is the basis for the cohesion of the euro. Nevertheless, there is agreement that the 25-year-old EU rules need to be revised. There has been criticism for a long time, but the reform process is tough. The EU Commission intends to present its proposal in autumn.
But reaching an agreement is a complex project. The camps are far apart. The heavily indebted EU members want to loosen up the rules comprehensively. Others, on the other hand, would prefer it to be even stricter. An agreement is not yet in sight in the EU Commission either, where the rift runs primarily between Monetary Commissioner Paolo Gentiloni and Trade Commissioner Valdis Dombrovskis.
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The traffic light government had to come to an agreement first. For months, financial politicians across Europe have been looking in the direction of Berlin. The German position is “extremely important,” says one of those involved. The federal government’s proposal now mentioned is somewhat accommodating for countries like Italy when it comes to reducing debt, but would at the same time put them under pressure due to the binding nature of the rules.
How exactly does finance minister Lindner want to reform the stability pact?
Additional rules were introduced during reforms, particularly in 2005 and 2011:
The medium-term budgetary goal (MTO) was supplemented: According to this, states may generally only incur annual debts of 0.5 percent of GDP. Wasn’t three percent mentioned earlier? Yes, the three percent is the general rule. The 0.5 percent first go through an economic adjustment, depending on the economic situation in the country. So more debt is possible in a crisis, less in an upswing.
If a state indebted more than this 0.5 percent per year, that is not automatically a breach of the rules. However, he then has to explain in his financial planning for the next few years how he is approaching the MTO target again. The following applies: New debt must fall by at least 0.5 percent annually.
In addition, a spending rule must be observed: government spending must not increase faster than the country’s economic potential grows.
It is questionable whether a European majority can be found for this. According to government circles, Germany is in a comfortable situation. One could live with it if there were no reforms. The debt rules are currently suspended due to the economic crisis. If no agreement is reached, they would apply in their old form again from 2024.
The advantage of the German position, however, is that no changes to the EU treaties would be necessary. Only a qualified majority is required, so not all member states would have to agree.
approval and harsh criticism
However, the response to Lindner’s advance does not give any indication that the direction is now clear. From praise to harsh criticism, everything is included. The latter comes from the Greens, of all people, whose members of the federal government support the compromise. Rasmus Andresen, spokesman for the German Greens in the European Parliament, does not support this. “Instead of acting like a disciplinarian, we expect Finance Minister Lindner to work constructively on this reform in the fall,” he said. He continues to work to create wide-ranging exemptions for climate investments.
>>Read here: Why Germany would benefit from a common EU debt redemption fund
A two-part picture comes from the European representative of the other Berlin coalition partner. The SPD MP Repasi welcomed the fact that Lindner is getting involved in more flexibility in reducing debt. The Finance Minister had declared that he would dispense with the controversial one-twentieth rule.
This states that highly indebted EU member states must reduce their debts to the Maastricht upper limit of 60 percent over the course of 20 years. For countries like Italy, however, such an austerity policy is considered unattainable. “It is a great development that the German finance minister is saying publicly that the one-twentieth rule is not realistic,” said Guntram Wolff, the new head of the German Council on Foreign Relations (DGAP).
On the other hand, Lindner wants to tighten the pact again: He proposes to enforce the so-called medium-term budgetary targets, which are not yet binding. According to this, the member states should in principle only be allowed to have an annual structural deficit of 0.5 percent or at least approach this goal in steps. Repasi calls it “somewhat unworldly in the middle of the war”. That only works if, at least at this point, expenses for certain investments are deducted.
The CSU MEP Markus Ferber is also skeptical: “Medium-term financial planning is always overtaken by reality.” Therefore, making the goals binding does not change anything. In the EU Commission, however, the medium-term budgetary target is definitely part of the talks, it is said.
“Grist to the mills of the populist parties”
As for Italy, however, the country could soon meet at least the first part of the said budgetary target. According to the government in Rome, the structural deficit – the key indicator for the medium-term budgetary target – was six percent in 2021 and is only expected to fall to 5.9 percent in the current year.
But with the expiry of the high obligations that arose in the corona pandemic, the decline is likely to be much faster afterwards. For 2023, the government only expects a deficit of 4.5 percent – that would mean that the EU budget target would be met for the time being.
The Ukraine war has again increased the financial pressure on the EU states.
(Photo: dpa)
However, there is another reason for refusing to nail down the medium-term budgetary target – and that is less economic and more political. “I don’t think it’s a good idea to make the medium-term budget target binding for all countries – it would go hand in hand with a significant loss of sovereignty for the countries,” said Jan Pieter Krahnen, Director of the Leibniz Institute for Financial Market Research (SAFE). Ultimately, this weakens Europe and is grist to the mills of the populist parties.
>>Read here: “We need a more reliable and ambitious path to debt reduction” – Lindner explains his plan
Ifo President Clemens Fuest, otherwise often in line with Krahnen, sees things differently. With the many calls for higher government debt, it is important that Germany wants to maintain the borders. “In this respect, the demand from the Federal Minister of Finance is to be welcomed,” explained Fuest.
DGAP boss Wolff sees it that way too. However, Lindner must be prepared for strong headwinds in the negotiations. After all, Germany has already circumvented its own debt brake three times: with its investments in the pandemic, in climate protection and most recently with the special fund for the Bundeswehr.
More: “Our most dangerous problem is inflation”: How Finance Minister Lindner wants to keep the euro stable