‘It feels like a completely different world’
Yesterday, the European Commission presented its reform proposal for the so-called “Stability and Growth Pact”, the EU’s rules for national public debts and deficits, which in the view of critics, have in the past neither supported stability nor growth.
Tensions have risen already ahead of the proposal, with liberal German Finance Minister Christian Lindner publicly drawing red lines.
Lindner is still famous in Germany for one phrase he said when he blew up coalition negotiations for a coalition government in 2017 with Angela Merkel’s CDU and the Greens: “It is better not to govern than to govern in the wrong way”.
The stance back then helped FDP gain voters’ trust as a credible voice for liberal – and in Germany, that mostly means ordoliberal – values.
In 2021, FDP gained additional votes – and Lindner ended up as the predecessor of fiscal hawk Wolfgang Schäuble, getting his dream job as Germany’s finance minister.
Better not to change the rules than to change them the wrong way.
Essentially, Lindner reiterated the position of the German government, which had been sent to the European Commission in an unofficial paper earlier this month, calling for “safeguard provisions” to “ensure a rapid and sufficient reduction of deficits and high debt ratios”.
Thus, when the Commission actually came out with its proposals, it came as it had to.
The Commission actually made some significant steps towards the German position by including so-called “safeguard provisions”, which for instance, ensure that public debt is already reduced during the first years of the new national plans.
Nevertheless, Lindner stressed that the proposals “do not yet meet the requirements of the German government”.
“No one should succumb to a misunderstanding that the German government’s approval is automatically assured,” he also said.
“But at least there are starting points in the Commission’s proposal that make further debate seem worthwhile,” Lindner also said. How generous of him.
Why such a strong statement, such a confrontational approach, you might ask?
The answer may be as simple as that: Those who shout the loudest will most likely achieve changes in their favour.
“I think the central negotiation will likely be with Germany because they are still very far apart,” said Philippa Sigl-Glöckner of German think-tank Dezernat Zukunft.
No one talking about green investments anymore?
With that, Lindner might have successfully shifted the debate away from what was previously expected to be the major issue: Green investments.
What struck her most when reading the legislative proposals, Sigl-Glöckner said, was the lack of explicit reference to green investments needed to get the EU on track for its ambitious climate targets.
“I have the feeling that it is a completely different world, to the world in which we are talking about massive transformations of our economies by 2030,” she said.
To account for those concerns, the Commission stressed that member states can ask for more time until they have to get serious about debt reduction.
This, however, comes with the condition of “reforms and investments” that are growth-enhancing, support fiscal sustainability, and are in line with the EU priorities, such as the Green Deal.
But precisely there, the problem lies, Sigl-Glöckner said. Because other than what the Commission wants them to be, many green investments might actually not be that growth-enhancing.
“Most of the investments we need now, the big ones, are climate investments,” she said. “They don’t necessarily bring growth because sometimes it’s simply the replacement of a blast furnace that makes fossil steel, for electrification, to make green steel”.
Thus, it is unsurprising that the Greens, who are also part of the German government coalition, were quite unhappy with Lindner’s push.
Lindner’s FT op-ed sparked strong criticism among leading politicians of his coalition partner, who have been surprised by his last-minute push.
And after the proposals came out, leading German Greens emphasised their desire to compromise.
“This legislative proposal is a significant improvement on the previously failed rules,” said Sven-Christian Kindler, spokesperson for the Greens in the German parliament for budgetary affairs.
However, “what has not yet been sufficiently taken into account in the Commission’s proposal is the necessary investment scope for the climate-neutral transformation of the EU,” Kindler also said.
“We have now reached a critical point: while the US wisely combines climate and industrial policy with fiscal policy, there is still too much silo thinking within the EU,” he said.
Maybe – just maybe – silo thinking within the German government could be the problem, too.
Chart of the Week
One of the “safeguard provisions” included by the European Commission – and the one that got particularly much attention – is the one for a minimum “fiscal adjustment” of 0.5% of GDP per year for all countries and years in which they exceed the 3% deficit limit.
This might be particularly tough for some countries, namely those with the highest deficits now.
However, growth forecasts – and with it anything that is measured in a “to-GDP” ratio – also depend on factors like the ageing population. Thus, other countries, too, could have problems later on.
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