Germany and France still at odds over reform of the EU fiscal rules

Berlin is rallying allies to push for uniform standards that can improve compliance while Paris advocates flexibility to give highly indebted countries greater room for manoeuvre.

Under current rules, member states are required to keep their budget deficits under 3% of gross domestic product (GDP) and their public debt levels below 60% in relation to GDP — thresholds that many governments exceed after years of intense spending to cushion a succession of overlapping crises.

The framework has been on pause since the onset of the COVID-19 pandemic.

The bloc intends to bring the rules back into force in early 2024 but only after the intricate set of laws, known as the Stability and Growth Pact, has been reformed to cope with the green and digital transition.

The review has sparked an ideological battle between member states, which played out in open view during Friday’s meeting of economy and finance ministers in Luxembourg.

“The real point of disagreement is whether or not there should be automatic and uniform rules,” said Bruno Le Maire, France’s economy minister.

“Our answer is clearly no because we believe that would be an economic mistake and a political mistake,” he went on, appealing to the respect of national sovereignty.

“We have tried in the past to have automatic and uniform rules. This led to recession, economic hardship (and) a loss of production and growth in Europe. This is the opposite of what we want, which is more growth, more prosperity and more jobs.”

Christian Lindner, Germany’s federal minister of finance, expressed a diametrically opposed viewpoint, calling for a homogenous approach that would ensure a comparable degree of fiscal discipline across the board.

“In our view, automatic rules are very OK and are needed,” Lindner said, responding to a reporter who had asked him about Le Maire’s comments.

“We need a multilateral approach, we need equal treatment, we need numerical benchmarks and we need a common safeguard.”

Lindner added the European Commission should not have “too much leeway” in its bilateral negotiations with member states regarding compliance with the fiscal rules.

“Germany is not alone with its concerns,” he noted.

Ahead of Friday’s meeting, Lindner, together with 10 counterparts, released an op-ed making the case for rules that are “equally applicable” to all member states and ensure a “realistic, timely and sufficient” decline in deficits and debt levels.

The article was signed by the ministers of Austria, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Germany, Latvia, Lithuania, Luxembourg and Slovenia.

The Netherlands, a well-known fiscal hawk, was notably absent.

“We cannot allow debt levels to rise indefinitely from crisis to crisis. This would permanently overload public finances, which is particularly costly in times of rising interest rates,” the op-ed reads.

“As far as the capital markets are concerned, debt is debt. Capital markets are not interested in the motives for taking on debt, however worthy they may be.”

A hard-fought reform

Under the reform currently on the table, the long-standing 3% and 60% targets would be left untouched but the way in which they are met would significantly change.

Each member state would be asked to design its own mid-term fiscal plan to cut down its deficit and debt levels at a sustainable and credible pace. The country-specific blueprints will be negotiated between governments and the European Commission, and later approved by the EU Council.

The fiscal adjustments necessary to meet – or at least head towards – the 3% and 60% targets will be carried out over a period of four years, extendable to seven in exchange for further reforms.

This renewed focus on national ownership and flexibility has been welcomed by indebted countries like France, Italy, Spain and Portugal, but has raised suspicions from frugal-minded states, who fear governments would enjoy excessive discretion to rein in their public finances.

Mindful of this criticism, the Commission introduced four key safeguards to its legislative proposal with the aim of improving compliance and transparency:

• Countries whose deficit exceeds 3% of GDP will need to make annual adjustments worth 0.5% of GDP until the deficit falls below the mark.
• The debt-to-GDP ratio must be visibly lower at the end of the four-year plan.
• In case the plan is extended to seven years, the majority of the fiscal corrections should take place in the first four years, rather than being delayed to the very end.
• Net expenditure must always remain below potential economic growth.

The addendum did not satisfy Germany, which wants to introduce a minimum benchmark based on debt, rather than deficit, as the Commission has suggested.

Berlin’s benchmark would impose a debt reduction at a pace ranging between 0.5% and 1% every year, with a possible exemption in times of recession.

“Under normal circumstances, it’s not over-ambitious to reach for a 1% reduction in the debt-to-GDP (ratio),” Lindner said on Friday morning.

“As you know, there are member states who are above 100% which means in my lifespan I won’t see them returning to the 60% (target).”

While the op-ed does not include any numerical benchmarks, it does challenge the Commission’s approach to mid-term national plans, which, according to the 11 ministers, could be “rendered obsolete” by unexpected circumstances.

“We have to ask ourselves how effective reform and spending decisions will be if they are made too far in advance, also in light of the increasingly high uncertainties the Union is facing,” the ministers wrote in their joint op-ed.

“We are not convinced that timeframes for necessary consolidation efforts extending far beyond the cycle of a legislative period will yield the best possible results.”

But for Bruno Le Maire, the new economic environment created by climate change, the rise of artificial intelligence and the growing US-China rivalry justifies a fiscal overhaul based on the principles of “differentiation” and ownership.

“We all start from different public finance situations,” Le Maire said.

“We are committed to rules, we want firm rules and we want the rules to be respected. But we want rules that are smart and simple, and that will allow us to build European prosperity in the 21st century.”