Ironically, the Netherlands and Spain: The finance ministers of the two countries have now presented joint proposals for reforming the stability pact. The two countries usually belong to opposing camps on these issues. At the same time, Sigrid Kaag and Nadia Calviño made it clear that these rules for sound financial management in the EU will probably remain suspended for a long time. Then governments could cushion the consequences of the Ukraine war and the high energy prices for companies and consumers without the threat of a rebuke from Brussels because of excessive debt.
The Commission implemented the Stability and Growth Pact two years ago, so that the states can better react to the consequences of the pandemic. This set of rules, which sets ceilings for budget deficits and debt levels, should come into force again in early 2023. However, the Dutch Liberal Kaag said on the fringes of the EU finance ministers’ meeting in Luxembourg, she expects the Brussels authorities to extend this grace period: “I think that the circumstances would justify this,” she explained with a view to the uncertain economic situation. And she doesn’t think there will be a “serious debate” between the ministers. Her Spanish counterpart, Calviño, agreed.
The responsible economic commissioner Paolo Gentiloni stressedthat a decision on the extension will not be made until mid-May, after the Commission has published the next growth forecast. De facto, however, there seems to be no longer any doubt about this decision. Especially since the forecast for the current year will be disappointing: Gentiloni said that the previous forecast of four percent economic growth for the 19 countries with the euro currency is “probably no longer achievable”. The war and sanctions weighed on consumer sentiment, supply chains were disrupted and energy prices were driving inflation, the former Italian prime minister said.
A weak economy and the need to provide financial help to companies and consumers that are particularly affected will continue to put a strain on national budgets. The Corona crisis caused the mountains of debt to grow significantly. As a result, many finance ministers will find it difficult to comply with the Stability Pact once it is reactivated. Therefore, the commission came up last autumn a reform debate for this set of rules: In the months while the pact is on hold, the EU governments and the authority should agree on adjustments.
Holland and Spain are on the same side – that’s unusual
The commission promised to come up with proposals by early summer. However, the economists of the authority and the governments are well covered with more pressing issues, such as planning new sanctions against Russia. The fact that the pact does not come into force again at the beginning of 2023 could mean that the Commission will only present these reform ideas later, said several EU diplomats on Tuesday on the sidelines of the finance ministers’ meeting.
The controversial pact sets an upper limit for the annual budget deficit of three percent of economic output and a target for total government debt of 60 percent of economic output. But last fall the Commission predictedthat in 2023 only seven out of 19 euro countries will be able to meet the 60 percent mark.
Unfortunately, the Stability and Growth Pact stipulates that the Commission must urge highly indebted countries like Italy to quickly reduce their debt levels. The federal states should reach the 60 percent mark within twenty years. Italy is at 150 percent and would therefore have to aim for completely illusory budget surpluses for twenty years. It is therefore considered certain that the Commission will replace this rule with a more realistic concept in its reform proposals.
Dutch Finance Minister Kaag and her Spanish counterpart Calviño would more than agree. On the fringes of the ministerial meeting, they presented a joint discussion paper on the further development of the pact. This collaboration is remarkable because the two governments usually find themselves on opposite sides of the debate. The Netherlands attaches great importance to budgetary discipline, and Spain, which is heavily indebted, is urging the other southern Europeans to be more lenient. However, there now seems to be a consensus even among frugal governments that the 20-year rule does not work.
Therefore, the Netherlands and Spain suggest that highly indebted countries should rather draw up individual plans with the Commission on how they will reduce liabilities over the years in a pro-business and realistic way. The paper remains vague on other points of contention, such as whether the Commission should treat government spending on climate protection more generously. Some governments are asking for that. Kaag said she doesn’t think such exceptions are “wise”. The concept paper was “received quite well” by her counterparts, she added.
Is Poland’s government blackmailing the EU?
On the other hand, the behavior of the Polish finance minister was very badly received on Tuesday. The EU governments wanted to agree on the law in Luxembourg the reform of the century of corporate taxation in the EU. In autumn, 137 countries at the industrialized countries organization (OECD) agreed to introduce, among other things, a minimum tax of 15 percent on the profits of large corporations. This is intended to complicate the business model of tax havens.
The EU Commission presented in December a billto pour the minimum tax into European law. When it comes to tax issues, however, the EU finance ministers must unanimously give their placet. And Poland’s representative was the only one who didn’t play along. EU diplomats express the suspicion that this is not about factual issues, but that Warsaw wants to extort concessions in the long-simmering rule of law dispute with the EU Commission: for example, the release of billions from the Corona aid pot. Federal Finance Minister Christian Lindner (FDP) called the blockade “very regrettable”.