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In a very important move last year, the European Commission suspended its Stability and Growth Pact – to allow member states the fiscal leeway needed to tackle Covid-19 and prevent an economic collapse.
But with the economic recovery now well under way, the debate on European budgetary rules should resurface with force.
The financial details of this debate are undoubtedly obscure. But the outcome will shape the daily lives of European citizens for the foreseeable future, as it will determine what Member States can spend on, among other things, renewable energy and climate change mitigation.
However, the EU’s two main political players have so far remained largely silent on the issue.
To understand the implications of this and Sunday’s German election results, EUobserver spoke with the economist Shahin Valley.
The German debt brake
Vallée has been a prominent economic policy advisor in Germany and France for a decade.
First as economic advisor to the President of the European Council, Herman Van Rompuy, then as advisor to French Minister of Finance Michel Sapin. Today he heads the German Foreign Council.
This made him aware of the many different intellectual landscapes in which public spending, debt and deficits are debated within the EU.
While a diversity of opinions explains why it can be difficult to reach consensus on the issue, it also gives additional weight to the results of the French and German elections – if Paris and Berlin reach an agreement, the rest will likely follow. .
France, according to Vallée, could use its presidency of the Council of the EU in the first half of 2022 to take a position “on this complex issue”, which will coincide with the presidential elections.
But the debate will take place most furiously in Germany, which – according to Vallée – will have “dominant consequences for the rest of Europe”.
While fiscal rules did not play a major role in the German election, the debate will be on German politics whether they like it or not, Vallée says.
“If the FDP [liberals] and CDU [conservatives] end up in government, the discussion will be postponed, while the Greens are more inclined to change the rules to allow an increase in public spending. The SPD has been a bit shy about this and has avoided the conversation. But no matter who forms a government, Germany will have to have a tough conversation about fiscal rules. “
Vallée highlights an important decision of the first senate of the German Constitutional Court in Karlsruhe on the law on climate protection in April this year.
The judges instructed the German government to come up with more precise emission reduction targets before the end of next year. Otherwise, they might find the climate protection law unconstitutional.
This opens “a potential gap between the climate objectives of the German federal government and the” Schuldenbremse ” [debt brake]”.
In 2009, the CDU-led government amended the German constitution which added a 60% debt-to-GDP ceiling into law.
In addition, the German Länder are not allowed to run deficits above 0.35% of GDP.
One of the motivations was to reduce transfers from the federal government to the states. But more importantly, according to Vallée, it was an effort to reduce tensions between “rich†western states and “poor†eastern states in Germany.
“[The debt brake] ultimately reflects the idea that each state could stand on its own as long as it keeps its house in order, â€Vallée wrote in the Berlin Policy Journal.
But, like their EU counterpart, “these have proven to be unsustainable,” Vallée told EUobserver.
“Following the 2017 migration crisis, the law had to be updated to allow the necessary cash transfers to help local governments process one million new migrants. ”
And when the Covid-19 crisis hit in 2020, the law – like its EU counterpart – had to be suspended to allow for the large public investments needed to save the economy from collapse.
In times of crisis, significant cash transfers are necessary. Without it “the German federation will not survive” warned Vallée during a debate led by Dezernat Zukunft, a German think tank. But, he stressed, what this also shows is that amending the German constitution is not as difficult as it seems.
The outgoing CDU / CSU and SPD grand coalition avoided fundamental reforms. This time around, Germany and Europe cannot avoid reforming the tax rules because if they don’t, Karlsruhe, the seat of the constitutional court, will rush it for them, â€he wrote. in a note published on the website of the German Council Foreign Relations. ‘
Climate change = new rules
While Vallée admits he doesn’t have the definitive answer to what the new rules should be, one of the important outcomes should be that fiscal sustainability in Germany and Europe cannot take precedence over environmental sustainability.
“It doesn’t make much sense to have low debt for the future if there isn’t a future on the planet to begin with.”
He adds that the current rules do not meet the stability objective for which they are designed, as they favor a “restrictive†fiscal policy during crises, which led in 2010 to the European debt crisis.
He explains that current EU rules dictate that indebted economies reduce debt above 60% of GDP by 1/20 a year.
Italy has a debt-to-GDP ratio of 160%, which in practice means that it has to reduce its debt by 5% per year, which is impossible to achieve.
Like German regional governments, European member states need fiscal space to serve their economies, especially during an economic or environmental crisis.
New ‘golden rule’
That is why, says Vallée, the new fiscal rules should not set arbitrary limits but should provide guidance on spending. “A golden rule should be that states devote at least a minimum percentage of GDP to the green transition.”
Vallée adds that the rules could include exemptions for spending related to climate change. Countries wishing to invest more are encouraged to increase their spending on green technologies.
Although the committee has announced a review of European economic governance and the European Parliament will debate on its own this week, a pan-European consensus is unlikely without the German and French leaders.
Especially in Germany, this will put pressure on coalition talks to produce a mandate for the government to start changing fiscal rules.
“In a policy brief to the German government,” Vallée wrote that “the new coalition agreement must avoid language that would undermine Germany’s ability to engage and lead.”
Because if Germany does not take over the tax reform, “the [European] the union will continue to fail with each new crisis. “
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