GWhen it comes to fending off demands for more billions for political projects, Finance Minister Christian Lindner (FDP) is currently in practice. During the ongoing budget negotiations in Berlin, he has to fend off many spending requests from his cabinet colleagues. Now he traveled to Rome to learn first-hand about the budgetary discipline of Prime Minister Giorgia Meloni’s new right-wing government.
After more than two hours of sitting with his counterpart Giancarlo Giorgetti from the right-wing populist Lega party, they both agreed – in their disagreement. Not with the imminent end of vehicles with combustion engines from 2035 in Europe. Both the FDP leader and the Italian government want to prevent this, as both ministers assured themselves once again.
They disagree when it comes to solid government finances and the future of EU debt rules. “We interpret the council proposals differently,” said Lindner afterwards on one of the seven hills of the Eternal City, the Capitol, above the Imperial Forums.
When asked about the differences with Giorgetti, Lindner pointed out that there were countries in the EU that wanted to make exceptions to the debt rules for certain expenditures, such as for the green transformation.
“Others say: Debts are debts”. If you want to spend more money on something, you have to save elsewhere. It wasn’t difficult to understand which of the two had made the “debt is debt” statement.
For weeks, Lindner has been asking his fellow finance ministers in other countries how they intend to keep the EU debt rules in the future. He was in The Hague, Helsinki and Vienna. All three are regarded as supporters of solid state finances and clear rules.
However, the more heavily indebted southern countries, such as Portugal, Spain, France and Italy, are decisive. Germany must find a compromise with them. There isn’t much time left.
If the member states do not agree by the end of the year, the same EU debt rules that applied before the Corona and Ukraine crises will come into force on January 1st. Everyone wants to prevent that. At least everyone agrees on that.
Lindner doesn’t want to let himself drift. Not by Italy and the other indebted countries – and certainly not by the EU Commission. “As long as we have not agreed on a new set of rules, the applicable law must apply, the Commission cannot create facts through the back door,” he said. This is “unacceptable”.
With these clear words, Lindner reacted to an advance in Brussels the day before. On March 8, Vice President Valdis Dombrovskis and Economics Commissioner Paolo Gentiloni not only officially announced that the corona-related exceptional rules for debt would expire at the end of the year. They also explained to the member states that parts of the reform ideas that have been proposed but not yet decided should already be incorporated into the budget plans for 2024.
When the national budget plans are to be assessed in May, they want to take a “medium to long-term perspective” more than before. According to the Commission’s ideas, when assessing a country’s debt policy, it should no longer be looked at year by year, but instead take a medium to long-term perspective.
In the future, countries must therefore achieve a sustainable debt reduction path within four years, otherwise an excessive deficit procedure will be initiated. However, the adjustment phase can be extended to up to seven years upon request. Already in this Lindner sees a softening. You can make the schedule more flexible, but it must be clear that the direction is always downwards.
Negotiate debt reduction with the EU Commission
At the Commission, however, people are not only thinking about reducing existing debts, but also about how to deal with new debts. The proposal is not just about Member States being able to negotiate debt reduction targets individually with the Commission.
Eagerness to reform should be rewarded. The more courageously a country reforms and invests in it, especially in climate protection and digitization, the more breathing room it will have in terms of debt according to the plans.
All of this is too vague for Lindner, as he once again made clear in Rome. From his point of view, the minimum requirement for the future Stability and Growth Pact is that there continue to be “requirements cast in figures”, as he said. Requirements that must apply equally to all countries and are understandable for citizens and capital markets.
In his view, the cornerstones of the previous rules must remain in place: in normal times, the budget deficit must not exceed three percent of economic output, and the total debt level must not exceed 60 percent of gross domestic product. Changing them would be a fatal signal from the point of view of the German finance minister.
He can imagine an accommodation in the speed with which highly indebted countries have to approach the debt ceiling of 60 percent. According to the previous regulations, each country has 20 years to do this.
Lindner is prepared to make this so-called “one-twentieth rule” a little more generous. But then also for everyone. It cannot be the case that each country negotiates an individual multi-year debt reduction plan with the EU Commission in the future.
Italy’s debt sustainability
The EU Commission wants to judge each country according to its individual performance. She sees the decisive criterion in this regard as debt sustainability. What is meant is that as long as the capital markets still consider the national debt to be sustainable, a country has nothing to fear.
Of course, Italy should not be able to avoid austerity measures afterwards. Because on the capital markets, in times of rising interest rates, one closely monitors whether Italy can still manage its high debts – only Greece has a higher ratio.
In the next few weeks there will be a lot of discussion about future debt rules, not only in Rome and Berlin, but above all in Brussels. In mid-March, the finance ministers want to adopt a concept paper. In April, the Commission plans to present its legislative proposal.
Important decisions would only be made when “concrete legal texts are available,” said Lindner. In this he had agreed with Giorgetti. Anyway.
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