Germany wants stricter debt reduction rules for high-debt countries and tighter restraints on the European Commission’s scope to agree fiscal plans with EU capitals, as the bloc prepares for a sweeping overhaul of the union’s budget rules.
In a policy paper seen by the Financial Times, Berlin demanded that debt-to-gross domestic product ratios of heavily indebted countries should fall by 1 percentage point a year. For countries with less onerous debts, the minimum requirement could be a 0.5 percentage point a year.
Under current rules, member states whose debt surpasses 60 per cent of GDP have to plan for a 1/20th a year reduction of that burden — a speed even hawkish capitals admit can be unrealistically draconian.
The German paper feeds into a growing debate about overhauling the bloc’s fiscal rules. It seeks to put limits on the commission’s own proposal to strike bespoke deals with individual member states when setting out the path and pace of bringing their public financing back in line with the rules.
German finance minister Christian Lindner has been sceptical about leaving it up to the commission to craft and oversee those bilateral plans. The German finance ministry has been historically mistrustful of the commission’s role as a fiscal rules enforcer, given the leniency it has shown in the past to the budget deficits and debt reduction efforts of countries such as France — and even Germany.
In a bid to restrict the commission’s discretion when agreeing those plans, Berlin argues for “common quantitative benchmarks and safeguards, which are essential for a reformed fiscal framework”. The German paper also floats extra ways of limiting public spending growth among high-debt countries.
In an effort to answer calls for spending on key green and digital priorities to be protected, the German paper suggests changes to ensure spending related to EU programmes such as the post-Covid recovery plan is given favourable treatment. Still, it will probably meet resistance from member states with hefty public debt burdens who seek bespoke debt-reduction plans that leave plenty of scope for public investment.
The German finance ministry declined to comment. But a person briefed on the German position said the latest proposal by the commission “does not guarantee any sufficient reduction of public debt in Europe,” adding that for Berlin this was “not a matter for negotiation”.
“The sovereign debt crisis in the euro area has shown how serious the consequences can be both for the individual citizens as well as for the European project as a whole if confidence in the soundness of public finances is lost,” the person added.
However, critics say overly strict fiscal rules would hamper Europe’s growth potential. Olivier Blanchard, the former IMF chief economist, wrote on Twitter that the German proposal to require EU countries to achieve a fixed annual decline in debt levels each year “would be catastrophic”, adding that it would “lead to the worst form of pro-cyclical fiscal policy”.
The debate over the shape of the EU’s Stability and Growth Pact — designed to enforce fiscal discipline on member states — is gradually resuming after being suspended during the pandemic. Finance ministers last month agreed that new legislation should be pushed through this year, as they seek to settle an improved framework before the rules come back into force in 2024.
The EU is seeking to simplify a fiscal rule book that has for years suffered from patchy enforcement while failing to adequately incentivise critical public investments.
Additional reporting from Martin Arnold in Frankfurt