Stable public finances? Europe now wants to be excessive and not sensible

When the finance ministers of the Eurogroup meet in Stockholm, an old conflict will be inflamed with new fuel. The debt-ridden states – primarily based in the south of the European Union – want to push through a reform of the European debt rules.

Their motto: If the stability goals of the Maastricht Treaty are missed, then it wasn’t the excessive spending behavior that was wrong, but rather the target. Medically speaking: The patient does not want to reduce the calorie intake, but rather tighten the belt three holes. Bon appetit!

Proposals for the reform of the Stability and Growth Pact

On Wednesday, the Commission presented its menu proposals for the reform of the Stability and Growth Pact. Three points of the draft resolution are relevant:

1. The previously applicable fiscal rules will be softened and the heavily indebted member states will be given new leeway for subsequent debt reduction. Later becomes a lot later. From much later maybe never.

2. The total national debt should still not be higher than 60 percent of economic output. But in the event of an overrun, there will be no uniform guidelines for debt reduction in the future, but country-specific, individual guidelines. There will be good debt and bad debt in the future.

3. In the future, the EU Commission will have the last word. The paper states: The member states will draw up debt reduction plans and present them in Brussels: “These plans will be assessed by the Commission and approved by the Council on the basis of common EU criteria.”

You want to adapt the rules of reality – and not reality to the rules. The mathematical mechanics of the contract would be replaced by political decision-making.

The European debt union took its course

Compliance with the contract has already left a lot to be desired: Only once, in October 2018, was Italy asked by the Commission to revise its draft budget. The Italian government played for time, let deadlines pass and in the end made only a small adjustment to new borrowing.

The result: Not only the southern countries, but almost all member states expanded their borrowing. The European debt union took its course – supported by the ECB’s zero interest rate policy:

• In Greece, the national debt in relation to the gross domestic product in 2022 was around 170 percent.
• In the same year, Italy reports a national debt of 144 percent and France one of 111 percent of economic output.
• Only seven countries from the 20 member states of the euro zone still met the Maastricht requirements in 2022.

Significant adjustments to create binding rules

How do you get back to solid public finances? Finance Minister Christian Lindner and his chief economist Prof. Lars Feld are asking themselves that. Other countries are asking other questions: In France and Italy, people are wondering how the rules can finally be adjusted so that they no longer disrupt expansionary fiscal policy.

Lindner knows that he is not allowed to sign the requested free ticket to the debt union. Before leaving, he says: “Clear adjustments are still needed to turn the proposal into reliable, transparent and binding rules.”

He receives support from Jürgen Matthes, economic researcher at the Institute of German Economics in Cologne: “With these proposals, there is too much room for political influence. There are no binding minimum conditions for debt reduction.”

Conclusion: Even if changes are still being made, the direction remains. The majority of countries are schizophrenic in terms of financial policy: people admire the Germans for the stability of their state finances, only to then talk them out of it. Europe now wants to be excessive and not sensible.