The EU’s 27 members have spent freely since the start of 2020 to support their economies and citizens through a global pandemic, a war on their doorstep, and soaring energy prices. Back in 2020, a richer North EU members reluctantly signed up to a debt-financed recovery fund worth 806 billion euros ($880 billion, or about 5% of EU GDP in 2022) which mainly benefits the south and east of the union. But high interest rates have distorted those plans.
At a summit on December 14-15, all but one country reached agreement on how to complete the budget EU budget to finance more financial support for Ukraine (a reserve of 50 billion euros over the next four years), as well as higher interest rates on EU debt and additional support to countries facing an increase in the arrival of refugees. The compromise was less generous than the European Commission, the bloc’s executive body, had hoped, but it was enough to win agreement from almost everyone.
The only opposition came from Viktor Orban, the Hungarian Prime Minister. He had just given his tacit agreement to the opening of accession negotiations with Ukraine, after the EU He released 10 billion euros in funds intended for Hungary, previously frozen as punishment for its violations of the rule of law. The price of approving the broader budget plan is likely to be that of EU to release Hungary’s remaining and still frozen 20 billion euros. But its influence is limited. Ideas put forward to circumvent its veto include recourse to the European Stability Mechanism (MY), the euro zone rescue fund which has a lot of spare capacity. If Mr Orban’s bluff is called early next year, he could well fold.
Finance ministers, meanwhile, are still trying to sort out another budgetary mess. The eurozone’s byzantine deficit rules were barely workable before the Covid-19 pandemic. These measures were too complex, imposed too onerous demands on highly indebted countries and led to procyclical budget cuts without giving much, if any, space to green investments. When the pandemic hit, the rules were suspended to allow countries to spend freely, and have not been enforced since. With their return scheduled for early 2024, they were in desperate need of an upgrade.
The commission had proposed rules that would give it more power and stick less slavishly to numerical targets. Countries would agree to adjustment plans to reduce debt and engage in investments and reforms that would boost growth. But Germany wanted to require countries to reduce their deficits and debt by a set minimum amount each year. As The Economist According to the version in press, France was to give in on December 20, after much back and forth, on the rather selfish condition that these new measures would not be fully applied before the end of President Emmanuel Macron’s mandate.
Rules that are too prescriptive can indeed pose a problem, as Germany itself illustrates. In November, its Constitutional Court declared various accounting tricks illegal under the country’s strict deficit rules. The governing coalition has since combined budget cuts and tax increases to close the gaps, at a time when Germany’s economy is stagnating and the country is expected to invest heavily. Sometimes getting by isn’t enough. ■