Stability pact debate puts traffic lights under pressure

Berlin, Brussels, Rome, Paris September 2021: Olaf Scholz stands on the roof terrace of the German embassy in Paris, behind him the Eiffel Tower rises into the blue sky. The SPD chancellor candidate has just come from a conversation with Emmanuel Macron.

Scholz talks a lot about his good relationship with the French President, but at one point he becomes taciturn. A new version of the EU debt rules is not necessary, the Federal Finance Minister makes clear. During the pandemic, it was seen that the so-called Maastricht criteria already allowed “very great flexibility”.

Scholz is holding on to this position, even now that he has advanced to become chancellor in spe. But dealing with the national debt in Europe is likely to pose a number of problems for him. First and foremost with France, which will take over the EU Council Presidency in January and would like a reform of the rules laid down in the 1990s, with a lot of support from the EU Commission in Brussels.

While the possible traffic light coalition in Berlin is still sorting itself out and struggling to find its financial policy course, the EU Commission is pushing a debate on the Stability Pact. The “consultations”, it is clear, are intended to pave the way for a reform of the debt rules.

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In an analysis of the economic situation that the Commission intends to present on Tuesday, EU officials warn of the “high economic costs” of premature austerity. The Handelsblatt has a draft of the 14-page paper.

Unattainable debt target

The reduction of the national debt, which has risen sharply in the pandemic, is a “central challenge” in order to “build up buffers”, write the commission experts. However, the consolidation process must be “realistic, gradual and sustained”.

For the Commission, the debt debate is a tightrope walk. Hardly any other European political issue is so emotionally charged. The euro countries are divided. In addition to France, countries such as Italy, Spain and Greece are also calling for the rigid rules to be relaxed. The “thrifty four” are resisting this: Austria, Sweden, Denmark and the Netherlands.

Whether and how the dispute can be resolved will depend largely on the position of the future federal government. The Greens and the SPD are open to reform, while the FDP fears a dam break. However, a number of countries have not complied with the Maastricht criteria for a long time.

Influential economists are therefore calling for the Stability Pact to be adapted to the changed situation. Most recently, IMF chief economist Gita Gopinath spoke out in an interview with Handelsblatt in favor of reforming the EU debt rules.

Scholz’s formula that the pact in its existing form would offer enough leeway for financial policy does not sound very convincing to some experts: “A flexible interpretation is important, but not enough to solve the investment problem,” says Guntram Wolff, director of the Brussels business think tank Bruegel .

Wolff alludes to EU estimates that annual investments of more than 1,000 billion euros are necessary if the EU is to keep its climate commitments. For comparison: Most recently, the total amount of investments in Europe was only 683 billion euros per year. Wolff’s suggestion is that expenditures that serve the climate-friendly transformation of the economy should be exempted from the debt limits.

There seems to be sympathy for this idea in the Commission. “The promotion of environmentally friendly, digital and resilience-promoting public investments could deserve special attention in view of the long-term challenges for our economy,” says the agency’s analysis of the situation.

The French in particular will be happy to hear that. Finance Minister Bruno Le Maire recently told his EU colleagues at a meeting in Slovenia that some of the European debt rules were “obviously obsolete”. The Ministry of Finance in Paris emphasizes that France wants to stick to the three percent limit. However, it would like green investments not to count towards this criterion. When it comes to the 60 percent target, Le Maire’s officials are even clearer: This no longer corresponds to “the economic reality in the euro zone”.

Paris plays the Maastricht reform issue through Brussels. First of all, we will await the consultation process of the Commission and the proposals from experts. The hope at the Élysée is that the reform process can succeed “as peacefully as possible”.

It is unclear how important the debate will be during the French presidency in the first half of 2022. In Paris government circles it is pointed out that the Maastricht reform is not a priority of the Council Presidency. Because of the suspension of the debt rules until the end of 2022, there is still a time buffer to get results.

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The debt limits were drawn up in the late 1980s. At that time, a raised mean value of the actual debt of the potential euro countries was determined and these values ​​were linked to the economic environment at the time.

In concrete terms, this meant that growth of three percent and an inflation rate of two percent were assumed. But the world turned out differently. Growth weakened, as did inflation. “The EU debt rules have become obsolete because the world today is fundamentally different than it was 30 years ago,” says Bert Rürup from the Handelsblatt Research Institute.

Many euro countries reacted to the financial and corona crisis with record spending. As a result, many countries are now not in debt at 60 percent, but twice as much or even more. Take Italy as an example: At 155.6 percent of economic output, the national debt is higher than ever before. Only Greece is worse off in the euro area.

Finance Minister Daniele Franco recently presented the financial planning for the coming years: According to this, the debt should still be 146.1 percent of the gross domestic product in 2024. Before the corona crisis, this value was 134.8 percent. The Italian government has repeatedly called for the Stability Pact to be reformed so as not to stifle growth. Because of the challenge of climate change and the pandemic, it is difficult “to stick to the rules that we had two years ago,” emphasizes Prime Minister Mario Draghi.

According to experts such as Rürup, debt limits only make sense if the goals can be credibly achieved and violations can be consistently sanctioned. A literal obligation of the regulations would oblige the EU member states to save hard for a long time to come.

In the case of Italy, for example, this would amount to an annual debt reduction of five percentage points. “If the EU debt rules of today were applied consistently, they would result in austerity programs under which the countries of southern Europe would perish,” said Rürup.

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Scholz actually shares this conviction. His defensive stance towards reform is primarily tactically motivated in order to balance out the different opinions in a future traffic light government. Scholz himself has long since recognized the need to rethink the old rule.

The policy department in the Federal Ministry of Finance has been working on concepts for a reform of the Stability Pact for months. Among other things, the actual interest expenditures for debts are played through, instead of looking purely at debt figures measured against economic output, as was previously the case.

Unions and employers agree

In any case, the topic is gaining momentum. The trade unions and employers’ associations represented in the European Economic and Social Committee (EESC) as well as other civil society organizations have also drawn up a reform proposal. It is available to the Handelsblatt.

“A reintroduction of the old debt rules would have dramatic consequences for the economic recovery of the EU and would jeopardize European cohesion,” warns DGB chairman Reiner Hoffmann. That is why quick “concrete steps are now necessary, which the member states can agree on without lengthy treaty changes”.

Specifically, the social partners propose three points. First, public investment should be exempt from the debt rule. Second, the member states should be given more flexibility in reducing their debt. Instead of rigid dismantling plans, longer, country-specific and more flexible dismantling paths are needed. Thirdly, the debt rules should be designed to be less stimulating to the economy.

The European Parliament also joins the discussion. “With the canonization of the existing rules we are harming ourselves,” warns Green finance expert Sven Giegold. Because the Commission needs criteria that it can also use to implement reforms in the member states. CDU politician Daniel Caspary, on the other hand, holds: “Just because you have to stretch further to reach the goal doesn’t mean the goal suddenly becomes wrong.” He doesn’t see “why the upper limit of 60 percent should be softened”.

More: IMF chief economist: “Germany is facing great challenges”.

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