The prospect of an agreement on fiscal rules has long been surrounded by doom and gloom, with Germany’s opposition to the far-reaching changes proposed by the European Commission providing the greatest cause for pessimism. However, it is possible that the expected changes are coming, POLITICO reports.
Last month, the French and German governments succeeded in unlocking the positive momentum now seen in the talks. Both countries say the two-day retreat between President Emmanuel Macron and Chancellor Olaf Scholz was a “huge atmospheric success,” which, given the current state of relations between the two countries, is very important.
According to those present in Hamburg, Germany and France committed themselves to reaching agreement on the two biggest outstanding issues: electricity market reforms and economic governance. And in line with that commitment, after months of unsuccessful negotiations, an agreement on the latter was finally reached earlier this month.
Overall, the Commission’s aim is to migrate the single set of Stability and Growth Pact fiscal adjustment requirements into more individualised, bilaterally agreed fiscal adjustment plans unique to each member state, based on debt sustainability analyses.
Countries would then have either 4 years to reduce their debt-to-GDP ratio or 7 years if they also undertake reforms and investments that contribute to the realisation of the EU’s strategic priorities. However, for much of this year, Germany remained highly anxious about whether this approach could achieve sufficient debt reduction, according to POLITICO.
The Commission’s original target seemed too unambitious – simply to achieve debt reduction by the end of the term without giving specific numbers – and EU members with high deficits and debt, such as Belgium, France, and Italy, found it too onerous.
For example, the Spanish presidency has put forward several counter-proposals that would reduce debt by an average of 1 per cent of GDP per year, but over a longer period, such as 14 to 17 years. And there is currently more support for this option.
However, as these would be minimum commitments that member states would sign up to in advance, senior EU officials believe they would be enough to win the support of Christian Lindner’s finance ministry and the German chancellery.
After such a debt agreement finally became possible, Germany and other frugal EU member states have opened a “second front” of debate regarding the budget deficit. Germany is now demanding that member states effectively achieve a budget deficit of 1 per cent of GDP by limiting the countries’ public spending growth (to below the growth potential of their economies), POLITICO reports.
France, like many other member states, strongly disputes this view. In their view, Germany’s drive to increase the deficit has no economic justification. As one senior French official noted:
“We need sustainable debts, not the lowest debt possible.”
Part of the problem is that Germany does not trust the Commission to enforce the new rules. In addition, Berlin is increasingly concerned about the direction of Italy’s economic and fiscal policy under Prime Minister Giorgia Meloni.
In addition, Lindner remains committed to balanced budgets in Germany – the infamous “black zero” (schwarze Null) – and believes this should apply across the EU.
At the same time, there are a number of other issues that need to be discussed and agreed upon. For example, what reforms would member countries have to undertake to gain additional time to implement their debt reduction plans? And what categories of investment spending might be treated differently when calculating the budget deficit? Nevertheless, the dispute over the level of deficit reduction needed is now the key issue. If the deal falls apart, it is likely to be for this reason, POLITICO reports.
So negotiators are now working against the clock, trying to reach an agreement by the EU finance ministers’ meeting on 8 December – a deadline that may well move into the new year. Once an agreement is reached among EU member states, this will open the way for negotiations with the European Parliament, which negotiators hope will result in a final text of the law before the break for next year’s elections in early June.
Although the new rules will only start to apply from 2025, and even then they will not fully apply to countries with deficits of more than 3 per cent of GDP and in the so-called excessive deficit procedure, this new impetus is welcome.
No deal will lead to a new wave of anxiety about the state of Franco-German relations and, more broadly, the EU’s ability to get its fiscal house in order. In the absence of a deal, fiscal policy between Brussels and member states would also have to be agreed annually, and the process of agreement and its outcome would be highly opaque and uncertain, which in turn could spook markets, according to POLITICO.
In the past, when low growth rates have forced governments to resort to austerity measures, it has been mainly to cut public investment, which is politically easier to cut than current spending, but which undermines the long-term growth potential of the economy.
That is why the logic of this reform, modelled on the EU’s flagship economic recovery and resilience fund, is so important. And if it passes, it is likely to lead to more public investment, smarter deficit and debt reduction, and reform – all the things the EU economy so desperately needs.
