Jhere is no dog in a hot dog, a koala is not a bear, and let’s not talk about urinal cakes. What about the EUof the “Stability and Growth Pact” (PSC)? The agreement limiting national government indebtedness has achieved none of its stated goals: Europe has endured a prolonged currency crisis and decades of economic torpor. So few lamented the suspension of the pact in 2020 as Europe navigated its way through the pandemic and now scrambles to offset soaring energy bills. Germany is now pushing for the old straitjacket to be reintroduced, but only a much looser arrangement seems likely. The fact that the Berlin hawks are likely to be challenged shows how much German influence has diminished.
No fault line in EU is as deep as the one that separates frugal northerners from their supposedly spendthrift neighbors to the south. The PSC was an attempt to bridge the gap. Developed in anticipation of the introduction of the euro in 1999, it capped annual budget deficits at 3% and overall debt at 60% of GDP. Italy and Greece would share a currency with Germany and the Netherlands, but only if they also shared their sober approach to public finances. It was never really so: the pact was soon broken willy-nilly, even by Germany, in its first years. Many countries ended up with debts exceeding 100% of GDP as the global financial crisis unfolded. In the 2010s, the bailouts the pact was meant to avoid became inevitable.
Despite his failure, the PSC always matters. It has pushed governments to ensure that spending somewhat matches income, at least in good times. The underlying principles guided the response to the eurozone crisis from 2009, which southerners say has always imposed an unnecessary fiscal drag on their recovery. If it was a mistake, it was not repeated two years ago: when the pandemic hit, all parties agreed that the old rules should be abandoned. The European Commission, the bloc’s executive arm, will unveil its ideas for a refreshed version in October as the PSC comes into effect by 2024.
Brussels is preparing for a repeat of familiar rows pitting countries with Mediterranean coasts against those with cooler beaches. In fact, the first discussions between finance ministers seem to indicate that almost everyone wants to abandon the old approach. Germany is essentially the only one pushing for a return to the current state of affairs. There’s still plenty to haggle over late at night. But as things stand, it seems unlikely that it will succeed.
The key word in the new approach proposed by the committee is “flexibility” in the application of the PSC. The rule of 3% deficit and 60% debt will remain: these figures are entered in EU processed and tweaking them is basically impossible. The emphasis is therefore on their application in a completely gentler way. No more harassment year after year by Eurocrats from countries with “excessive deficits”. Instead, national finance ministries will come up with ideas on how to balance their books over many years. Engaging in reforms considered sensible in Brussels – spending on renewable energy, for example, or raising the retirement age – will have the effect of allowing a country to ignore those pesky budget limits.
This is music to the ears of southern Europeans; most imagine that “flexibility” will mean better listening to Eurocrats. France also likes this approach, as you would expect from a country now in its 48th year without a balanced budget. But Germany would have in the past been able to derail a push toward such potential debauchery. How did he end up so isolated?
On the one hand, the position of his own government is unclear. Christian Lindner, the German finance minister, has made hawkish statements about the need for fiscal prudence both at home and in Europe. But it is the third-largest party in a three-party coalition, which also includes Greens who favor big spending to decarbonise the economy. Olaf Scholz, the chancellor, has other priorities: he has pledged 100 billion euros ($97 billion) for the armed forces in response to the war in Ukraine. The windfall will not be included in Germany’s national accounts, the kind of sleight of hand that Berlin would once have frowned upon. When the Germans falter, others feel less compelled to tighten their own corset.
Germany also lacks allies these days. Many traditional Northern European pinchers wonder whether tough fiscal rules are compatible with ambitious plans to cut carbon emissions. Few want to discuss divisive fiscal rules when EU the unit is at a premium. Many Eastern Europeans have low debt but want to spend a lot more on defence, if only to replace the equipment they sent to Ukraine. They blame Germany for pampering Russia for years and becoming addicted to cheap gas; they think he could do more to help Ukraine now. Few are in the mood to take lessons from Berlin.
Tax rules, okay?
Germany’s insistence on fiscal rectitude still carries the weight. Most buffs believe that a reform of fiscal rules should include central fiscal capacity, modeled on the €750 billion temporary fund set up during the pandemic. This is not expected, thanks to German and Dutch resistance. Even in the absence of harassment from Brussels, many countries with faltering public finances are adopting reforms. Emmanuel Macron in France is pushing for an increase in the retirement age. Giorgia Meloni, the new Italian Prime Minister, made reassuring remarks on public finances.
And if the commission does not impose balanced budgets, others could. Markets are able to turn quickly against governments they deem profligate, as Britain discovered this week. On the continent, bond vigilantes are being kept at bay by the European Central Bank, which is buying up bonds from Italy and others; he promised to do more if needed. Its chair, Christine Lagarde, has warned finance ministers that loose public finances could drive up inflation, forcing the bank to raise rates quickly. Few will doubt that she is serious. If Germany can no longer be Europe’s fiscal bad cop, at least someone else is ready to take over. ■
Read more from Charlemagne, our columnist on European politics:
To avoid diplomatic jerks, Europe must rein in abusive national vetoes (September 22)
The demonization of nationalist parties has not slowed their rise in Europe (September 15)
Norway is embarrassingly profiting from the war in Europe (September 8)