Mint Explainer: The EU's brewing battle over budgets
3 min read 07 Oct 2022, 01:00 PM ISTThe EU members are bound by the Stability and Growth Pact. But many states, constrained by energy crisis, resent strict fiscal rules.
PremiumThe onset of a European energy crisis, following closely on the heels of the pandemic, has wreaked economic havoc on the Continent. With households suffering and industries slated to slow down, governments are looking to loosen their purse strings and Europe’s strict fiscal norms on government debt. Mint unpacks the brewing battle over budgets between a hawkish Germany and other European players.
What are the EU’s fiscal rules?
Members of the European Union are bound by certain fiscal rules laid down under the Stability and Growth Pact. For example, national debt cannot exceed 60% of GDP while the budget deficit cannot exceed 3% of GDP. These rules exist to rein in reckless spending by member states.
These rules have long been controversial among member states. While dominant players like Germany see them as a means to promote stability, weaker members like Italy and Greece resent the restrictions on what they see as a sovereign decision. However, Berlin has been quick to point out that resolving economic crises caused by excessive spending and debt bubbles will invariably be borne by the German taxpayer. This was the case in the Eurozone Crisis in the early 2010s.
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What is the latest controversy about?
The pandemic stretched even the most fiscally prudent states thin. National economies needed mammoth rescue packages to keep going and the constraints imposed by the Stability and Growth Pact were temporarily removed. However, these rules are set to come back into force in 2023, much to the resentment of some states.
Given the ongoing energy crisis and the war in Ukraine, some leaders have suggested that certain forms of spending should be exempted from the EU rules. These include investments in renewable energy and national defence. Many countries, especially those that suffered after the 2008 financial crisis, do not want to return to the tight straitjacket imposed by Eurocrats in Brussels. Germany has been pushing for a return to the way things were before the pandemic.
What is likely to happen?
It seems unlikely that the continent will return wholesale to the old way of doing business. Given the security threat posed by Russia and the painful rise in energy prices, few countries have any taste for strict controls on spending. Many also believe that an ambitious climate and renewable energy agenda will require untold billions in public investment.
A more flexible version of the Stability and Growth Pact is likely to be introduced in the coming years. Experts speculate that enforcement and advice from Brussels will resemble guidance more than the diktats they are currently seen to be. Reform measures like pushing back the retirement age may be rewarded with increased flexibility to spend.
Where does Germany stand in all of this?
For years, German bureaucrats and politicians were the high priests of fiscal prudence in Europe. Now, they are increasingly a voice in the wilderness. German finance minister Christian Lindner is sceptical about lax spending rules and believes that exemptions for climate spending will be taken advantage of by canny bureaucrats and politicians.
However, few seem to be listening to his warnings. Germany has pledged 100 billion euros to modernise its armed forces — these expenditures will not be reflected in the country’s national accounts. Many in Southern and Eastern Europe, who would like to spend similarly, see this as a sign of German hypocrisy. France, another highly developed Western European power, is happy to have looser spending rules. This leaves Berlin with no good allies.
Many analysts are pointing to the battle over fiscal rules as a sign of just how much Germany’s influence, once dominant, has waned.
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