31st May 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)
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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.

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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.

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"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.


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