The Ministers of Economy and Finance of the 27 have conspired this Tuesday to try to move forward before the end of the year, during the Spanish presidency, the reform of the fiscal rules and the governance structure on which they rest. The general spirit is quite clear: move from identical rules for all to more individualized criteria, give each capital (ownership) more responsibility in its reform plans and adjustment paths, and bet on greater flexibility to reduce imbalances, change to also establish sanction mechanisms and more effective and realistic fines. The reform of a model, born in Maastricht and amended a thousand times, is essential, and everyone knows it, but Germany, always at the forefront of orthodoxy, is not at all satisfied. Any aspiration requires overcoming their doubts and listening to their demands in favor of clearer and more defined paths, perhaps even much more quantified, and it makes it very difficult to achieve it even before the next European elections, in 14 months.
In recent weeks Germany has done two very unusual things in Brussels. The first, a last-minute blockade of the final approval of the legislation that will prohibit the sale of vehicles with combustion engines from 2035 in the European Union. The second, this same party, another unexpected blockade that forced the reopening of a Eurogroup declaration, which had already been closed at a technical level, through which the ministers gave the green light to the guidelines for the reform of the economic governance framework of the Union. In the EU it is normal for there to be endless, slow, tiring negotiations, but it is not normal for the continent’s leading power to make these movements when the ambassadors, the sherpas and even the Economic and Financial Council have already reached an agreement, have polished a document and awaits only ratification.
The departure of Angela Merkel, and the tensions within the coalition government, are noticeable in Berlin. Olaf Scholz is still looking for his method, his rhythm, his alliances. But between the partners there is surprise, discomfort and even indignation for the forms. “It is improper, Germany does not do these things,” says a diplomatic source. “If it doesn’t happen again, it will be a minor anecdote, but if it becomes the norm, the Union cannot function,” laments a community source.
All countries have their obsessions, their red lines, their main themes, but there is no point in breaking the procedure. If Berlin had reservations about the proposal to reform the governance framework, it is normal to air them in the appropriate forums, in the previous steps, but not at the last moment, when everything should have been settled so that the Eurogroup or Ecofin can sell a story of cohesion, unity and understanding. Always positive but essential in the middle of a war in the backyard, coming out of a crisis, with energy pressure and banks failing in the US.
What the German government, which has the liberal hawks of Minister Christian Lindner at the helm of the Finance Ministry, says is that Brussels has gone too lax. There are two parallel debates and both do not feel represented. The Commission made its proposal last week and now, after receiving the general support of the Eurogroup, it will have to present a legislative project in the coming months. But in addition, Paolo Gentiloni’s team has decided otherwise: for the year 2023-2024, and since it will go from one system to another, a bridge is necessary, a moment of transition. That is why it has recommended prudence in its fiscal guidelines, but has ruled out this year opening an excessive deficit procedure for those who exceed the classic threshold of 2023. It will be done in the spring of 2024, but not before.
Berlin is not satisfied. As Lindner said on Monday upon his arrival, they are willing to be included as well if the rules apply now, but he wants more rigor. That discipline begins to recover next year (although much more nuanced than in the past) is not enough for them. And they want countries, like Spain, that have a path to drop below 3% in 2025 to have to be more strict. Brussels has already said that this April all governments will have to present a very clear, detailed plan with a credible and sustainable adjustment path. But the frugal are asking for more, and have even tried to peg that aspect as general rule reform.
“Both things have not been linked in today’s meeting,” said the Spanish vice president Nadia Calviño, ruling out a bargain or trade off after last-minute German pressure, which has forced a change in the language of the declaration, but not its overall tone. An incomplete text, focusing on the things they agree on, but leaving everything else out. “We have reached an understanding on a number of key elements and principles for reviewing the EU tax rules. After many months of discussion and consultation, this is a very welcome step forward towards a simpler system, greater ownership by part of the countries and more room for debt reduction, combined with stricter enforcement. But there is still work to be done on the details and reach convergence on some remaining open issues,” said Community Vice President Valdis Dombrovskis.
Point 7 of the communiqué, which includes these open issues, is where Germany has wanted to include an explicit reference to the possible introduction of common quantitative references for all. Until now, for example, the rules fixed a debt reduction of 1/20 annually, something that the Commission wants to see disappear, but that the most orthodox aspire to maintain in some way. “The Eurogroup calls for swift work to continue and agrees that further clarification and discussion is needed, including on the definition of the Commission’s trajectory, the requirements for member states deemed to have low debt challenges (possibly including a fiscal path), the definition of the spending aggregate, the adequacy and design of common quantitative benchmarks to support the reformed framework, the principles for an extension of the fiscal path, the role of country-specific recommendations, the application of national plans and incentives for reforms and investment”, says the paragraph of the controversy.
The reform is urgent, essential before the end of the legislature, but complicated. Like the Banking Union, it is delicate in Germany and the heads of the European Commission and the European People’s Party are German and conservative. There are also elections in other countries, such as Spain, which has the presidency and will be in charge of managing the council’s agenda from July. And that his priorities are very clear. The deadline can go to 2024, but the later, the more chaos, because on January 1 the previous rules will return, rules for a world that has little to do with the one that has emerged from the pandemic and the clash with Russia and the energy markets. Europe likes to play with fire, but with so many fires surrounding it, burning is becoming easier.
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