December 18, 2023 - 10:00am

If you’re lucky, your workplace will be winding down for the Christmas to New Year lull. There’s no let-up in finance ministries across the European Union, however. This year, they face last-minute, make-or-break negotiations — with the very future of the EU at stake.

The big issue is the Stability and Growth Pact, which is the legally binding promise on the part of every member state not to borrow too much. As a percentage of national GDP, there’s a 3% limit on annual budget deficit and a 60% limit on overall public debt.

Because of the Covid pandemic, these fiscal rules were loosened in 2020. However, the amnesty runs out at the end of this year. The most indebted EU nations thus face a dismal prospect. Debt-to-GDP ratios are currently above 100% in Belgium, Portugal, Spain and France — and above 140% in Italy. If the old rules return, then any excess over the 60% limit would have to be reduced by 1/20th every year.

For economies still reeling from Covid and the energy crisis, that’s an impossible demand — all the more so when one includes the long-term investments required to achieve Net Zero and a credible defence policy. Something’s got to give — hence the frantic negotiations on reforming the fiscal rules. The French are leading the charge for greater flexibility, but guess who’s standing in the way of change? It’s the Germans.

In theory, Germany also could do with some fiscal wiggle room. Yet, being wedded to the ideology of ordoliberalism — i.e. neoliberalism with sado-masochistic elements — the Germans take fiscal discipline to perverse extremes. For instance, the EU’s Stability and Growth Pact isn’t good enough for them — they also have to have their own national version (the “debt brake”) which they’ve foolishly incorporated into their constitution. Even if the EU rules are reformed, the stubborn German restraints open up the prospect of an ever-wider debt gap between Germany and France (not to mention Italy, Spain etc.).

It’s hard to see the German government agreeing to EU rule changes that go further than their own very modest domestic adjustments. If Olaf Scholz were to concede much more than that to Emmanuel Macron, then the governing coalition in Berlin could fall apart. With the Right-wing AfD riding high in the polls, that’s not something Scholz would want to risk right now.

Macron could always veto a miserly reform package, but the Germans would still win because in the case of no agreement the old fiscal rules return by default. Then again, the long-term winner may prove to be Marine Le Pen. Humiliation for France would boost her chances in the 2027 election — and her party is already set for a crushing victory in next year’s European Parliamentary elections.

Meanwhile, on this side of the Channel, we have our own problems. But at least we’re not bound by Germany’s national hang-ups. The British government is free to borrow as much money as the markets are prepared to lend it.

Therefore, my thoughts right now are with Keir Starmer. By the end of next year he’s likely to be prime minister. And so, as he finalises his spending plans, I hope he’ll take a moment to give thanks for Brexit.

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.