The view is fantastic, at least from the Prague Congress Center looking down on the Czech capital. This does not apply to Europe’s economic prospects at the moment: the energy crisis and inflation are causing problems for companies and citizens. At their meeting in Prague at the weekend, the EU finance ministers discussed how they can support the European Central Bank (ECB) in the fight against high prices. They also exchanged views on reforms to the Stability Pact, i.e. the rules for sound budgetary management.
Both projects are politically extremely sensitive. An anti-inflationary financial policy means that governments have to hold back with broad-based support programs for the economy. Stimulating demand with higher government spending is out of the question because this demand would further fuel inflation. Federal Finance Minister Christian Lindner (FDP) said after the meeting that he and his counterparts had “clearly committed to at least a neutral fiscal policy”. In other words, government spending shouldn’t support the economy – and with the “at least” Lindner hints that, because of inflation, it might even be better to brake. According to him, the 27 finance ministers were also “unanimously” of the opinion that combating inflation now has priority over boosting the economy.
At the same time, however, citizens and companies are suffering from high energy prices, and economists are warning of a severe downturn. The German Finance Minister said that of course “relief for households that are particularly affected, for people with a lower income, is necessary”. And the fact that energy costs lead to “structural breaks” in sectors must be “prevented as best as possible”.
Targeted help is therefore possible, but the EU finance ministers do not want a huge support program, such as that launched by Olaf Scholz (SPD) as finance minister at the beginning of the pandemic. The current chancellor said at the time that they wanted to get out of the crisis “with a bang” and called his aid package a “bazooka”. Instead of the Panzerfaust principle, the crisis aid should now follow the precision rifle principle.
In fact, however, the governments often applied their aid against the energy crisis too broadly, warned EU Economic Commissioner Paolo Gentiloni in Prague. “Measures could be more targeted towards the households and companies most suffering,” said the former Italian prime minister. However, he is aware that governments “cannot always easily implement this principle” in a situation in which so many households – including those from the middle class – have problems.
According to calculations by the Commission, the costs of the support packages in the EU countries already correspond to almost one percent of economic output. And this amount will “rise significantly by the end of the year,” said Gentiloni.
The Stability Pact is being reformed
The aid programs will thus further increase national debt. The Covid crisis caused liabilities to rise sharply. In the EU should the Stability and Growth Pact prevent the debt from getting out of hand and a new sovereign debt crisis looming, similar to about ten years ago. However, the Commission had these rules for sound financial management at the beginning of the pandemic exposed, so that governments can better support the economy. The pact should come into force again in 2024 at the earliest.
Until then, the governments want to reform the complicated set of rules. This sets an upper limit for the annual budget deficit of three percent of economic output and a target for the total debt of each state of 60 percent of economic output. Last year, however, the level of debt in the euro countries was average at 97 percentand only eight of the 19 countries kept deficits below the three percent mark.
The EU Commission intends to publish its reform proposals in the second half of October. Some governments, including the German one, have already presented their own ideas. The finance ministers also exchanged views on this in Prague. Lindner said the “ideas about concrete reforms” continued to differ: “We still have work to do here.” The FDP politician complained that not all governments had used the long upswing before the pandemic to reduce debt. Debt ratios have “increased many times, even in good times – it has to be different”.
More leeway, but stricter control
That in August featured concept the federal government is tantamount to showing more leniency on debt reduction targets and budget deficits. In return, the new rules should then be observed and enforced more consistently. So far, the Stability Pact has often “raised very tough requirements on paper”, which, however, are not reflected in better results in the long term, said Lindner.
The Commission’s considerations go in a similar direction. Commission Vice President Valdis Dombrovskis said in Prague, the pact could give governments “more leeway” in the future, but “this leeway must be accompanied by stricter enforcement”. So the EU finance ministers have more difficult debates ahead of them in the autumn.