EU finance ministers meeting this week at a venue outside Stockholm 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, which are expected to cut spending under the proposal.
On Wednesday, the European Commission proposed a document including tougher benchmarks for debt reduction and fines – which was seen as a concession in Berlin.
However, German Finance Minister Christian Lindner criticized the rules in a press release, insisting on even stricter benchmarks.
Central bank governors will join finance ministers this weekend to coordinate support for Ukraine’s reconstruction and will also include sessions on supporting growth in the EU.
The new spending rules are relevant for ECB President Christine Lagarde because of the recently introduced transmission protection instrument. This allows the central bank to buy government bonds if some countries face unsustainable borrowing costs in capital markets. But to be eligible, a country must agree to EU fiscal rules.
Although the commission has sought common ground, the talks are not expected to go smoothly. Lindner, in a statement, said he would “work constructively, but no one should mistakenly believe that Germany will automatically consent to the proposals.”
An EU diplomat representing a frugal country previously told EUobserver: “But this is only the beginning of a very technical phase of the legal negotiations. So I think it’s safe to say that it will take a some time to get a deal in. a tough negotiating position, which is pretty good for us because it moves the needle a little bit more to where we want it.”
Negotiations are expected to last until next year.
Not green enough
A loose coalition of green lawmakers, economists and NGOs has sounded the alarm, warning that the proposal does not leave enough fiscal space for countries to meet their climate and social goals. “We are appalled. There is no guarantee that the fiscal space generated by this reform will be used for investments in climate action,” said Isabelle Brachet, tax 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 approved by the Council of Member States. Basically, they will be based on what is called “debt sustainability analysis”.
But the bloc’s “do no significant harm” principle does not apply to debt reduction plans, leading Brussels-based think tank ZOE Institute for Future-fit Economies to conclude that “there is a lack safeguards to ensure” that none of the tax plans “harm environmental or social objectives”.
“A successful green and just transition will only be achieved with significant public funding – however, the proposed new fiscal rules still do not provide enough incentives for investments in climate action and social policy,” said the executive director Jakob Hafele.
As a solution, the think tank suggests that debt incurred by green investments should be given more headroom, extending the debt reduction trajectory.
The “obsession with debt-to-GDP ratios” is “useless,” Philippa-Sigl-Glöckner and Max Krahé of German think tank Dezernaz Zukunft wrote in a syndicated op-ed on Wednesday.
“Policymakers should focus more on relevant macroeconomic indicators such as 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 block assets,” the researchers added.
“This proposal will largely fail to give governments enough space to increase climate investment,” political economist Philipp Heimberger wrote in an in-depth analysis of EU budget rules he wrote on behalf of the European Parliament.