28th May 2023

EU finance ministers meet for tough clash on spending rules

  • EU Commission president Ursula von der Leyen (centre) and ECB president Christine Lagarde meeting with Eurogroup president Paschal Donohoe (Photo: European Commission)
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EU finance ministers meeting in a venue outside Stockholm this week are expected to clash over new spending rules.

So-called 'frugal' countries, led by Germany, will be pitted against indebted countries, led by France and Italy, that would have to cut spending under the proposal.

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On Wednesday, the EU Commission proposed a document that included tougher benchmarks for debt reduction and fines — which was perceived as a concession to Berlin.

However, German finance minister Christian Lindner criticised the rules in a press release, insisting on even harder benchmarks.

Central bank governors will join finance ministers over the weekend to coordinate support for Ukraine's reconstruction and also include sessions on supporting growth in the EU.

The new spending rules are relevant for ECB president Christine Lagarde due to the recently-introduced Transmission Protection Instrument. This allows the central bank to buy up government bonds if individual countries face unsustainable borrowing costs on the capital markets. But to qualify a country has to acquiesce to EU fiscal rules.

Even though the commission has sought a middle ground, talks are not expected to go smoothly. Lindner, in a statement, indicated he would "work constructively, but no one should be under the misunderstanding that Germany will automatically consent to the proposals."

One EU diplomat representing a frugal country previously told EUobserver: "But this is only the start of a very technical phase of the legal negotiations. So I think it's safe to say it will take some time to hammer out a deal. The Germans are staking out a challenging negotiating position, which is pretty good for us as it moves the needle slightly more to where we want it."

Negotiations are expected to last into next year.

Not green enough

A loose coalition of green legislators, economists and NGOs have sounded the alarm, warning that the proposal does not leave enough fiscal space for countries to achieve their climate and social targets. "We are dismayed. Nothing guarantees that the fiscal room generated by this reform will be used for investments in climate action," said Isabelle Brachet, fiscal reform policy expert at Brussels-based NGO CAN Europe.

Debt pathways under the current proposal will result from negotiations between individual member states and the commission and must be signed off by the Council of member states. Crucially they will be based on so-called "debt sustainability analysis."

But the bloc's 'do no significant harm' principle does not apply to the debt-reduction plans, leading Brussels-based think tank ZOE Institute for Future-fit Economies to conclude that "there is a lack of safeguards to ensure" that none of the fiscal plans "do any harm to environmental or social objectives."

"A successful green and just transition will only be achieved with major public funding — however, the new fiscal rules proposed still don't provide enough incentives for investments in climate action and social policy," said executive director Jakob Hafele.

As a solution, the think tank suggests debt incurred by green investments should be granted more leeway, by extending the debt reduction path.

The "obsession with debt-to-GDP ratios" is "unhelpful," Philippa-Sigl-Glöckner and Max Krahé from German think tank Dezernaz Zukunft wrote in a syndicated op-ed on Wednesday.

"Policymakers should focus more on relevant macroeconomic indicators like the primary fiscal balance (which excludes debt service), as well as more meaningful indicators of long-term prosperity, such as the zero-carbon readiness of the bloc's assets," the researchers added.

"This proposal will by a large margin fail to give governments sufficient space to increase climate investment," political economist Philipp Heimberger wrote in an in-depth analysis of EU fiscal rules he wrote on behalf of the EU Parliament.

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