21st Sep 2023

Germany pushes 'one-size-fits-all' EU spending rules

  • German finance minister Christian Lindner is pushing for a one-size-fits-all rule on government spending (Photo: INSM/Flickr)
Listen to article

Following ferocious debates between member states about spending rules in March, the EU Commission is now set to present legal proposals in late April.

In it, the commission proposes that highly-indebted member states should come up with debt-reduction plans to get their arrears down after four years and are allowed to extend this period for another three years to allow for investments to kickstart growth.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Hawkish member states have said this is too lenient. And on Wednesday (5 April), Germany made the first move, sending the commission a non-paper detailing what it hopes the new spending rules will become.

In it, Berlin proposes "common quantitative benchmarks" to "ensure" equal treatment between member states and "timely and sufficient debt reduction."

The paper states that highly-indebted countries' GDP growth should always exceed the growth of expenditure, a function described as the "convergence margin."

"For member states with high debt ratios, the minimum difference could be one percentage point," the plan proposes. The debt-to-GDP ratio should also decline by "at least one percent" per year for member states with debt ratios above 60 percent.

Commission horse trading

It differs from the commission proposal in that it aims to deliver a "one-size-fits-all solution" as a backstop to individual backsliding, according to Sebastian Mang, a senior officer at the think-tank New Economic Foundation.

In contrast, the commission proposal is "more bespoke and gives increased power to the commission to work out individual deals with member states."

In the commission proposal, member states are grouped by risk category based on the so-called 'debt sustainability analysis risk framework' (DSA), based on which individual debt-to-GDP ratios are projected.

According to the most recent simulations, Greece would top the chart of debt reduction — going from an expected debt-to-GDP ratio of 156.9 percent in 2024 to 107.3 percent in 2038 — under unchanged policies, close to a 50 percentage point drop in 14 years.

Portugal follows with a 33.5 percentage points decrease, then Italy (-22.4 percent), Spain (-21.9 percent) and Belgium (-20.2 percent).

The commission presents this tool as a "well-established analytical toolkit for assessing debt sustainability risks, based on transparent assumptions and methodology."

But Dutch think tank Instituut for Politieke Economie (IPE) pointed out DSAs are "not apolitical algorithms calculating the optimal fiscal policy" but are, in fact, highly sensitive to small changes made in the assumptions on which they are based.

This means decisions made based on what appears to be a technocratic tool can have a big impact on national spending policies. To bring critical fiscal negotiations back to the realm of democracy, the IPE proposes safeguards and suggests the council of member states, the EU Parliament and national parliaments should all sign off on any plans coming out of the budgetary negotiations.

But the German one-size-fits-all solution leaves far less room for political horse-trading in the first place. If a country's output is expected to be 1.5 percent, its spending is limited to 0.5 percent of GDP.

Austerity beats green investment?

According to the German government, spending limits would "foster investment, particularly in the green transition", by eventually restoring public finances.

Moreover, Berlin is ready to accept "additional EU programmes" can be exempted from debt rules which would allow indebted countries some leeway for social and green investments.

But Mang warns both the commission and the German proposals leave "insufficient" space for the investments needed to prevent "climate breakdown."

Political economist Philipp Heimberger recently estimated green investment needs in Europe are "at least 10 times" the amount currently allocated under the EU's pandemic fund, which earmarked 37 percent of the €724bn budget for the green transition.

This puts EU funding for climate investing at €200bn until 2026, or "13 percent of spending needs," according to the economist Claudio Baccianti, who is an economist at Agora Energiewende, a German think-tank.

In a recent book, Baccianti estimated green investment across the EU should increase by 1.8 percent of GDP (1.1 percent excluding public transport) — a target harder to achieve if spending is limited by a hard spending cap imposed on national governments. That is €250bn a year.

Limiting government spending to one percent beneath projected growth would make such a target unlikely under current economic conditions. To prevent fiscal rules hampering climate investments, Heimberger argued the EU needed a permanent investment fund — based on the "positive experience" of the one-time pandemic fund — for climate and energy of "at least" one percent of EU GDP annually.

The frugal blockade

Commission president Ursula von der Leyen has said she would propose a European Sovereignty Fund by the middle of this year.

But negotiators and finance ministers from the so-called 'frugal countries', including Germany, Finland, the Czech Republic, Denmark, Estonia, Ireland, Austria, the Netherlands and Slovakia, have warned against "permanent or excessive non-targeted subsidies," with the Netherlands and Germany especially opposed to new joint debt.

Looser EU fiscal rules agreed, with 'country-specific' flexibility

EU finance ministers agreed on new spending rules, copying much of previously existing rules. One worry is that only three countries — Sweden, Denmark and Luxembourg — could currently afford to meet green commitments while meeting debt and deficit rules.

Latest News

  1. Report: Tax richest 0.5%, raise €213bn for EU coffers
  2. EU aid for Africa risks violating spending rules, Oxfam says
  3. Activists push €40bn fossil subsidies into Dutch-election spotlight
  4. Europe must Trump-proof its Ukraine arms supplies
  5. Antifascism and fascism are opposites, whatever elites say
  6. MEPs back Germany's Buch to lead ECB supervisory arm
  7. Russia to blame for Azerbaijan attack, EU says
  8. Fresh dispute may delay EU-wide migration reforms

Stakeholders' Highlights

  1. International Medical Devices Regulators Forum (IMDRF)Join regulators, industry & healthcare experts at the 24th IMDRF session, September 25-26, Berlin. Register by 20 Sept to join in person or online.
  2. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  3. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA
  4. International Medical Devices Regulators Forum (IMDRF)Join regulators & industry experts at the 24th IMDRF session- Berlin September 25-26. Register early for discounted hotel rates
  5. Nordic Council of MinistersGlobal interest in the new Nordic Nutrition Recommendations – here are the speakers for the launch
  6. Nordic Council of Ministers20 June: Launch of the new Nordic Nutrition Recommendations

Stakeholders' Highlights

  1. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  2. ICLEISeven actionable measures to make food procurement in Europe more sustainable
  3. World BankWorld Bank Report Highlights Role of Human Development for a Successful Green Transition in Europe
  4. Nordic Council of MinistersNordic summit to step up the fight against food loss and waste
  5. Nordic Council of MinistersThink-tank: Strengthen co-operation around tech giants’ influence in the Nordics
  6. EFBWWEFBWW calls for the EC to stop exploitation in subcontracting chains

Join EUobserver

Support quality EU news

Join us