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The EU is heading for a fiscal showdown

Once again, Germany is the odd one out. Credit: Getty

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.

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Mike Doyle
Mike Doyle
6 months ago

Keir Starmer… I hope he’ll take a moment to give thanks for Brexit. Humilty from a Remainer? I’d eat my hat, if I had one.

Quentin Vole
Quentin Vole
6 months ago
Reply to  Mike Doyle

Are you sure about Sir Kneeler’s position? Have you checked which way the wind is blowing? Anyway, he was (when expedient to be so) a staunch suppoorter of Corbyn, who was anti-EU (although he kept uncharacteristically quiet about it).

Martin M
Martin M
6 months ago
Reply to  Quentin Vole

Yes, it was always clear that Corbyn was a Leaver sleeper agent in the Remainer camp.

Anthony Roe
Anthony Roe
6 months ago

Nobody takes these ‘rules’ seriously including all the national governments. Just kick the can….there’s another 20 years to Argentina, well maybe 15.

Mike Downing
Mike Downing
6 months ago
Reply to  Anthony Roe

Quite true, and France have Germany both ignored them pre-Covid if it suited them.

But don’t underestimate the EU’s ability to turn this into a crisis by mistake, especially with Dear Ursula at the helm.

Ian Barton
Ian Barton
6 months ago
Reply to  Mike Downing

The EU Commission aims to achieve its “united states of Europe” by grabbing more power from any available crisis that comes up – whoever caused it.

Last edited 6 months ago by Ian Barton
Right-Wing Hippie
Right-Wing Hippie
6 months ago

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.
Now who can argue with that?

j watson
j watson
6 months ago

Does it balance the higher rate of inflation in the UK than in the Eurozone?

Anthony Loftus
Anthony Loftus
6 months ago
Reply to  j watson

I would imagine it would depend on how the calculations are done and who is doing them.

j watson
j watson
6 months ago
Reply to  Anthony Loftus

Yep I’m sure a difficult one to get objective balance in how one might weight these things. But the point being perhaps we have a more of a problem with something they don’t which can have significant consequences for borrowing too. Whether one then prefers our problem to there’s an interesting debate.

Peter B
Peter B
6 months ago

As much as the markets are prepared to lend it.
We shall no doubt find out exactly how much that is soon enough. And it may well be less than the experts and forecasters assume. We’ve been floating on a bubble of cheap money and loans from abroad (what used to be called “hot money” back in the 1980s) for far too long. Or as I would put it, fake economic growth.
Lest JW (in this thread) gets too excited, the overall outlook is certainly no better in the EU. The one thing going for us is the ability to react and correct quickly. Whether we take the opportunity is another question. The EU probably has another 10 years of can-kicking before reality finally becomes unavoidable.

j watson
j watson
6 months ago
Reply to  Peter B

It all looks v difficult right now wherever one sits. Some of this outside the control of either UK or EU too.
We’ll await the UnHerd Article on why UK seems to have more structural problem with inflation than the EU to balance this article. And assuming one compares us more with likes of France, Germany, Benelux, why our public services seem to be creaking alot more.

Steve Jolly
Steve Jolly
6 months ago

I seem to recall a couple wars being fought so that Germany couldn’t decide the fate of all of Europe, and now Germany is deciding the fate of all of Europe. SMH. I’m not sure how this happened but it makes me appreciate why the UK chose to abandon this sinking ship.

Susan Grabston
Susan Grabston
6 months ago

Since 40% of our national income is dependent on the kindness of strangers (aka overseas investors) compared with 25% for the US and 5% for China, it is clear that the Truss effect can strike at any point. We are unduly beholden to capital markets.
It’s about the only thing that encourages me that Starmer will be restrained. The bond vigilantes will do it for us. However, fiscal restraint will give way to cultural abandon. The UK will be a psychological hell hole by the time he’s finished suppressing speech in the name of hyper-liberalism.

Graham Stull
Graham Stull
6 months ago

“Because of the Covid pandemic, these fiscal rules were loosened in 2020.”
Small precision here: this was not because of the pandemic. It was because of the unprecedented and destructive measures put in place in response to the (likely laboratory-created) pandemic.
I just always need to get that out there.

Martin M
Martin M
6 months ago

I like the reference to the EU nations needing to have a “credible defence policy”. They haven’t had one up till now, but I guess this is a good time to put one in place.

Ian Barton
Ian Barton
6 months ago
Reply to  Martin M

Wouldn’t surprise me if the EU Commission offers to continue to allow fiscal indiscipline in return for setting up more central defence authority. It’s what they do.

Last edited 6 months ago by Ian Barton