EU Finance Ministers Gather to Discuss Debt Rule Reform
Thursday evening, finance ministers from the EU's member states will meet in Brussels to discuss and hopefully resolve their ongoing dispute over the planned reform of European debt rules. The dinner gathering at 19:00 is preceding or potentially scheduled for a more formal meeting on Friday, aiming to announce a political agreement in principle.
Fueled by a proposal from the European Commission in April, these negotiations envision individual debt approaches for each country instead of uniform reduction targets. This flexibility seems indispensable for large investments to combat climate change, transition towards renewable energy, and modernize national economies.
The capitals are not in unity, however, as economic powerhouses like Germany and France entered the negotiations with polarizing views. Based on diplomats, it remains unclear whether all countries will reach an agreement. Italy, for instance, is resistant to accepting strict, uniform regulations.
Currently, debt must not exceed 60% of economic output and budget deficits are supposed to stay below 3% of GDP. However, due to the effects of the coronavirus pandemic and the Russian attack on Ukraine, these rules have been temporarily suspended until 2024. Countries normally had to repay five percent of debt exceeding the 60% threshold yearly.
A return to the original debt rules poses a threat to Europe's economic recovery and have often been neglected prior to the pandemic, even by Germany. Federal Finance Minister Christian Lindner of the FDP is expected to attend the dinner, despite the ongoing budget negotiations in Berlin.
Two possibilities emerge concerning Germany's negotiating stance in relation to the German budget for 2024. If Germany decides not to acquire any new debt, Lindner could hold a firm position in Brussels. Alternatively, Zettelmeyer of Bruegel believes if Germany acquires additional debt over the coming years, Germany itself might agree to more lenience in Brussels, for example in regard to debt-financed climate investments.
Criticism of Lindner surges as Germany persists in advocating stringent and uniform debt rules at the EU level. Mang from the Brussels-based New Economics Foundation cautions against Germany's insistence on these policies, believing it to be nonsensical and wasteful while the climate crisis worsens. Green public investment can strengthen society and the economy and foster long-term debt sustainability.
The German constitutional court invalidated a reallocation in the German budget. Consequently, €60 billion earmarked for climate protection projects and the modernization of the economy over four years is no longer available. Currently, €17 billion is missing from the next year's budget as the traffic light coalition in Berlin struggles to find a solution to the budget dispute.
Additional Insights:
- The EU's 27 commissioners are to begin negotiations on the upcoming seven-year central budget that will run from 2028 to 2034. Repayment of the EU’s €300 billion joint borrowing program initiated during the COVID-19 pandemic could take a significant portion of the budget, estimated to be between 15% and 20% of the total budget.
- Ongoing debate in Germany revolves around reforming the country's debt brake rule, which limits the annual federal deficit to 0.35% of GDP and prohibits federal states from taking on new net debt.
- CDU leader Friedrich Merz has expressed an openness to reforming the debt brake to finance increased defense spending, although the party's official stance is to maintain the current rule.
- Other parties like the SPD and Greens advocate for loosening the debt brake to increase investment spending and maintain social welfare benefits.
- The European Commission, under Ursula von der Leyen, has proposed easing fiscal rules to boost European defense expenditure, which has drawn mixed reactions from EU ministers.
