On EU Budget Rules Reform, Member States Stand Divided
But also — China, EU/US Energy Council, Pollinators
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The Briefing
Just weeks before the European Commission presents its proposal to reform EU budget rules, divisions between member states on the subject remain significant. Last week, the disclosure of a German memo was enough to reignite the debate on the details of the so-called Stability and Growth Pact (SGP) reform.
REMINDER • The Stability and Growth Pact — the 60% public debt and 3% deficit ratio rule — was temporarily shelved in the wake of Covid-19, which caused the explosion of public debt in the EU. In 2020, the "general derogation clause" of the pact allowed these obligations to be lifted in order to deal with the health crisis and avoid subjecting member stateq to the exhausting excessive deficit procedure.
Due to the war in Ukraine and the current economic situation, the escape clause has been extended and is now expected to run until the end of 2024, after which the Commission hopes to see the birth of a revisited SGP.
REFORM • Last November, the Commission published a 28-page communication outlining the forthcoming reform:
The 3% deficit and 60% public debt rule would remain the same.
The Commission would propose reference budgetary adjustment paths every four years, which would then be broken down into national plans on a case-by-case basis.
The most indebted countries will have a period of four years before they have to start reducing their debt, compared with seven years for countries with average debt.
In the event that a country deviates from the budgetary path approved by the Commission or exceeds the 3% deficit, the financial penalties would be lower than under the previous system.
In short, the european executive wants to move towards more flexible rules adapted to each country, thus moving away from the budgetary orthodoxy that has characterized its position on the subject until now.
DIVISIONS • But this position is not to the liking of all member states, especially Germany, which has been very critical of the Commission. Among other things, Berlin fears that more flexible rules would be detrimental to reducing public debt in the EU. "A single monetary union also needs single fiscal rules," said German Finance Minister Christian Lindner last November.
On March 14, at a meeting of EU finance ministers, he insisted that the Commission consult the member states one last time before making its reform proposal. "The train cannot leave the station until its destination is clear," he told the press.
NON-PAPER • Last week, a German non paper seen by Euractiv reveals that Christian Lindner's criticisms are still valid.
On the one hand, Germany wants member states to start reducing their debt as soon as the reform comes into force. This goes against the four to seven year adjustment period initially proposed by the European Commission.
On the other hand, the German executive wants an annual reduction in the debt/GDP ratio of 1 percentage point for highly indebted countries and 0.5 percentage point for medium indebted countries.
CONCERNS • This second point has caused many economists to react. Calling this proposal potentially "catastrophic", Olivier Blanchard warned on Twitter against the pro-cyclical effects that this measure could have.
Indeed, during an economic crisis, the reduction of GDP leads to an increase in the debt/GDP ratio, which, if we apply Germany’s proposal, would increase the level of the minimum debt reduction obligation. In this case, while the implementation of an austerity policy may reduce the debt, it may further slow down the economic activity already affected by the crisis in question.
On Twitter, economist Sander Tordoir is more reassuring, pointing out that these percentages have yet to be determined: "These numbers are an opening bid in the non-paper ("could for example be foreseen...") (...). I read it more as making commitments to reduce debt in the ex ante planning process."
The German non-paper also foresees that the rules could be suspended during a crisis, which the European Commission wants to avoid.
DISAGREEMENT • But Germany's main criticism remains the Commission's individualised approach to debt reduction targets.
In short, Berlin finds it difficult to accept that the Commission could be able to adjust budgetary obligations for each country. Germany fears that the Commission could be too lenient and that the individualised approach could undermine the transparency of the budgetary rules.
WHAT NEXT? • The European Commission is expected to present its legislative proposal by the end of April. Until then, we recommend two opinion pieces on the above-mentioned debates, one by Rebecca Christie — whom we interviewed at the end of 2022 on the same subject — for Reuters, the other by Sander Tordoir and Jasper Van Dijk for Politico.
In Case You Missed It
CHINA • On April 8, Emmanuel Macron and Ursula von der Leyen have completed a state visit to China. In an interview with Politico, the French president defended his vision of a "strategic autonomy" for Europe in the face of the United States — which should not be blindly followed — and China — on which Europe should not be too dependent.
However, the head of state's comments on Taiwan sent shock waves both on the old continent and in the United States. "Do we have an interest in accelerating the Taiwan issue? No. The worst thing would be to think that we, Europeans, should be followers on this subject and adapt to the American rhythm and to a Chinese overreaction," said Emmanuel Macron.
In reaction, several European MPs with more skeptical positions towards China have signed a critical statement published by the Inter-Parliamentary Alliance on China. "It should be emphasized that the president's words are severely out of step with the feeling across Europe's legislatures and beyond," the statement reads. "Mr. President, you do not speak for Europe.”
The Macron's statements come as China is currently conducting military encirclement exercises around Taiwan, in reaction to Taiwanese President Tsai Ing-wen's visit to the United States and Central America.
For his part, Charles Michel, president of the European Council, seems to be defending Emmanuel Macron on Europe's strategic autonomy and the importance of not "blindly following" the United States.
While Ursula von der Leyen and Emmanuel Macron tried to show a united European front, the French president was more conciliatory towards China than the head of the European executive. Ursula von der Leyen said that the use of force to change the status quo between China and Taiwan was unacceptable, while Emmanuel Macron believes that it is in fact illusory to think China can be influenced on the issue.
ENERGY • On April 4, the tenth EU-US Energy Council took place. This initiative was created in 2009 to facilitate cooperation between the EU and the United States on energy-related issues. This was the first time the Council met since the beginning of the war in Ukraine.
At the summit, the United States pledged to continue supplying Europe with liquefied natural gas (LNG), with a target of 50 bcm — billion cubic meters — in 2023. LNG exports from the US to the EU nearly doubled in 2022 to support European supply diversification efforts in the context of the war in Ukraine.
The US and EU also reiterated their willingness to "directly confront" any attempt to destabilize energy markets, as Russia did during the Ukraine conflict.
POLLINATION • On April 5, 2023, the European Commission published a response to the European Citizens' Initiative (ECI) "Save Bees and Farmers! Towards a bee-friendly agriculture for a healthy environment".
As a reminder, although an ECI does not give European citizens the power of legislative initiative, it does allow them to materialize a common concern and to put pressure on institutions to act accordingly. Of the nine ECIs submitted since 2012, this is the seventh to which the Commission responds.
The European Citizens' Initiative "Save the Bees and Farmers!" reflects public concerns about the ecological and socio-economic sustainability of the European agricultural system. It calls on the Commission to:
Phase out synthetic plant protection products by 2035;
Restore biodiversity in agriculture; and
Support farmers in their transition to sustainable agriculture.
In its response, the Commission explicitly links the crisis of biodiversity loss to Europe's food security. In the EU, 80% of cultivated and wild flowering plant species depend on animal pollination.
While the Commission does not intend to make a new legislative proposal on the subject, it urges the co-legislators to quickly find an ambitious agreement on the legislative proposals already under consideration — notably the regulation on the sustainable use of pesticides and the new Common Agricultural Policy (2023-2027).
In January, the Commission also presented its revised initiative on pollinators, calling on the Council and the Parliament to fully engage on the issue.
What we’ve been reading
The CEPS has released a report by Doina Postica et al. on the state of convergence in the EU, which highlights the persistent weakness of growth among Southern members.
In a brief for the ECFR, Jeremy Shapiro and Jana Puglierin deliver a rather brutal assessment of the relative decline of Europe and of the resulting consequences for the nature of the transatlantic relationship.
Three good reads on the EU and the race for mineral resources: in the FT, Patricia Nilsson and Harry Dempsey sound the warning on the risk of lithium shortages in Europe, Marie Le Mouel and Niclas Poitiers write for Bruegel on the necessity of internationalising Europe’s strategy for critical raw materials, and Cecilia Malmström of the Peterson Institute asks if the scramble for rare earths will produce a transatlantic trade agreement.
This week’s newsletter is brought to you by Ysabel Chen, Marwan Ben Moussa, Augustin Bourleaud and Maxence de La Rochère. See you next Monday!