German Finance Minister Lindner Calls for Stricter Fiscal Rules in the EU

German Finance Minister Christian Lindner insists that the new fiscal rules of the European Union must have minimum numerical criteria for sustainable debt reduction in over-indebted countries.

– “The European Commission’s proposal must be improved as there are no guarantees we will see a reduction in debt and deficits in a realistic and reliable manner,” Lindner said in an interview with the European Newsroom (ENR).

Lindner states that the Commission’s proposal needs to be supplemented by introducing a rule that expenditures grow slower than potential growth and that public debt in countries where it exceeds 60% of GDP must be reduced by at least 1% annually.

The reform of fiscal rules is one of the hot topics that could dominate discussions in the EU in the second half of this year between those who insist on greater fiscal discipline such as Germany or the Netherlands, and highly indebted countries that fear that faster deleveraging could jeopardize their economic growth, further complicating debt reduction. The new rules should be agreed upon by the end of this year, during which the clause allowing deviations from the Stability and Growth Pact rules, which stipulates that the public debt ratio must not exceed 60% of GDP and the budget deficit must not exceed 3% of GDP, is in effect.

The strict Union rules on debt and deficit, known as the Stability and Growth Pact, have been temporarily suspended due to the COVID-19 pandemic, and this suspension has been extended until the end of this year due to high energy prices as a consequence of the Russian war against Ukraine.

Peaceful Croatia 

Croatia can expect this discussion to be calm due to its fiscal situation. According to government projections, the share of Croatian public debt in GDP is expected to fall to 62.6% by the end of this year, 59.8% in 2024, 57.5% in 2025, and 55.6% in 2026.  Finance Minister Marko Primorac recently told Hina that the current rules are “absolutely acceptable” and that Croatia is ready to support any improvements in terms of increasing transparency and simplicity of the new rules.

On April 26, the Commission announced a series of proposals for implementing the most comprehensive reform of EU economic governance rules since the end of the economic and financial crisis.

In its proposal, the Commission did not touch the rules that the budget deficit can amount to up to 3% of GDP and that the debt ratio does not exceed 60% of GDP. What would change with the new proposal is the speed of debt ratio reduction. Currently, the rule is that countries whose debt exceeds 60% of GDP must reduce their debt each year by one-twentieth of the difference between the share of public debt in GDP and the reference value of 60%. Such a speed of public debt reduction is completely unrealistic as it can have severe consequences for the economy and society as a whole and further reduce the ability of indebted countries to repay debts.

Therefore, the Commission proposed that highly indebted European countries be given greater flexibility in reducing debts and deficits. The Commission’s proposal does not foresee a universal rule on the speed of debt reduction that would apply to all members, but rather that the member states themselves would develop medium-term plans for debt reduction, the fulfillment of which the Commission would monitor.

– “We all benefit from the single market, and most member states also benefit from the monetary union, but these benefits are not guaranteed forever, so we must constantly work on this,” says Lindner, leader of the German liberal party (FDP), one of the three parties in the ruling coalition. Lindner has a reputation in the EU as a fiscal hawk due to his insistence on fiscal discipline.

– “Higher debt ratios and larger annual deficits are likely to weaken the single market and the euro in the future,” adds Lindner.

When asked whether insisting on faster debt reduction could jeopardize the growth of highly indebted countries, Lindner says that his proposal is not ‘overambitious’.

– “I do not believe that a minimum reduction of public debt by 1% annually is overambitious. How long would it take to return to the rule of 60% debt share in GDP? Not in my lifetime,” said the 44-year-old Lindner.

Several member states have far greater debt than the allowed 60%. Leading the way are Greece, whose public debt exceeds 189% of GDP, followed by Italy (152.6%) and Portugal (127%).

Lindner says that Germany is not isolated in its efforts for greater fiscal discipline.

The German minister emphasizes that his proposal for reducing public debt by a minimum of 1% annually also contains a clause for deviations in case of unforeseen events.

Lindner says that Germany is ready to actively participate in seeking a compromise on new fiscal rules by the end of this year, but that it would not be an “economic disaster” if this does not happen and existing rules are applied again.

– “We must be quick, but finding the best and most sustainable solution is more important to me than speed. Germany wants to reach a consensus this year and we are ready to negotiate day and night, during weekends and holidays, if necessary. But we must find the best solution, not the fastest,” he said.

Lindner says that on one hand, it is necessary to maintain a high level of public investment, but on the other hand, reducing the deficit and debt ratio has no alternative.

– “Excessive public debt would jeopardize our economic development and the reliability of the euro as our common currency. Therefore, we must change fiscal rules in a way that allows for adjustments in a more realistic manner than has been the case in the past,” says the German minister.

Avoiding a subsidy race with the United States

Lindner says that the European Union must not race with the United States in subsidizing certain economic sectors and that the EU is already doing enough in this regard.

– “If we compare the United States and the European Union, there is no shortage of public subsidies and state aid in Europe. Just look at Next Generation EU with over 800 billion euros and the American Inflation Reduction Act (IRA) with about 370 billion dollars. So, our problem is not subsidies,” said Lindner.

Instead of a subsidy race, the EU needs to advance in the area of capital markets so that more private funds can be mobilized for transitional investment needs. The American capital market is much more competitive than the European one, the minister emphasizes.

He also stated that the German massive aid package for households and the economy of 200 billion euros, known as the ‘Doppelwumms’, cannot be compared to the American Inflation Reduction Act (IRA).

Lindner says that the ‘Doppelwumms’ is intended to help due to high electricity and gas prices and for some severely affected sectors.

– “Moreover, we will not use all 200 billion euros. I expect that by April 2024, much less than half of that amount will be needed,” said Lindner.

Revision of the EU Multiannual Financial Framework

This year, the EU will consider the revision of the Multiannual Financial Framework, the seven-year EU budget. Lindner says he expects the Commission to seek additional funds, among other things, due to significant aid to Ukraine.

Lindner stated that he opposes increasing the European budget to be borne by member states and instead proposes reallocating existing funds.

– “Before increasing contributions from member states, additional financial needs should be covered by reallocations or using existing flexibilities in the EU budget for unforeseen events. Therefore, we do not see the need to introduce new own resources,” he said.

Lindner also stated that he is not in favor of any new instrument like Next Generation EU through the issuance of joint bonds, partly because existing resources have not yet been utilized. Regarding aid for the reconstruction of Ukraine, Lindner says that this is a separate discussion that should involve international financial institutions such as the IMF, multilateral development banks, and the G7.

Reducing inflation as soon as possible and not implementing fiscal measures against monetary policy

The German minister says that high inflation poses a problem for national budgets and for the financial instruments of the European Union.

– “Therefore, it is our responsibility to reduce inflation as quickly as possible. If we implement countermeasures to monetary policy through fiscal policies, for example, by increasing expenditures, then the fight against inflation will take longer and will harm our economies more,” said Lindner.

Lindner is also against the idea of excluding the costs of increased defense needs from the deficit calculation, as advocated by some countries.

– “We certainly need to improve our defense capabilities in Europe as the geopolitical situation has completely changed. However, I am not convinced that we need exemptions from fiscal rules for defense costs,” said Lindner.

– “Why am I skeptical? Simply because capital markets do not distinguish between motives for borrowing. For the capital market, debt is debt, and high debts lead to instability. This can spur inflation and reduce the sustainability of our public finances,” concluded Minister Lindner.