‘Austerity will return’

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After a process of almost four years, the negotiations on the reform of the EU’s fiscal rules have entered the very last phase: Trilogues ahead! Time is pressing, so let’s see what is still up for discussion.

On Wednesday, the inter-institutional negotiations between the European Parliament, member states in the European Council and the European Commission, known as the trilogues, kicked off.

Officially, trilogues will only deal with the so-called “preventive arm” of the new fiscal rules, i.e. the rules that tell member states in advance how much they can spend, not the “excessive deficit procedure” (EDP) that can be triggered when they don’t act accordingly.

The EDP is not subject to trilogues, because it’s a set in a “Council Regulation” for which the European Parliament only has to be “consulted”, i.e. it can be ignored.

But even where the Parliament has an official say, the Belgian Council Presidency, tasked with negotiating on behalf of member states, will argue there’s not much room for change compared to what finance ministers agreed in December.

“Council’s position represents a delicate balance between all the member states,” Belgian Foreign Minister Hadja Lahbib (MR/Renew) already warned MEPs ahead of their final vote.

Think about how difficult it was for fiscal hawks, led by German liberal finance minister Christian Lindner (FDP/Renew), to agree to the reform, which they primarily view as a relaxation of rules, and you understand the difficult position the Belgians find themselves in.

But Esther De Lange (CDA/EPP), one of the two chief negotiators for the European Parliament, stresses that she cannot deviate too much from what the Parliament just adopted.

“Both the European Parliament and the Council positions individually are based on a careful balance between rules on the one hand and room for investments on the other,” she told Euractiv, adding that “the difficulty is that Parliament and Council on several key issues chose different carrots and different sticks”.

“We are now embarking on a careful joint balancing act that can only succeed if both sides see their priorities reflected and perceive a fair sense of balance in the final result,” De Lange said.

The fact that the Parliament’s position was adopted with a broad majority might not play into her hands, so losing a few votes after the trilogue wouldn’t matter too much, but losing German support would very much do.

Also, if negotiations fail, the “old rules” would apply again, something that fiscal hawk Lindner will have less of a problem with than the investment-keen parts of the Socialists and Centrists in the European Parliament.

“Rather limited impact”

So, what about those differences?

In the view of Zsolt Darvas at think-tank Bruegel, they don’t matter too much anyway.

Most prominent is the “deficit resilience safeguard” that the Council – on behalf of Lindner – included in its position, while the Parliament doesn’t have an equivalent. It means that countries must strive for a deficit of maximum 1.5% of GDP; if they are above it, they must reduce their deficit by at least 0.25% per year. (Details here). 

But “the debt sustainability analysis (DSA) itself requires more fiscal adjustment than this 1.5% deficit resilience requirement”, Darvas told Euractiv.

Remember, the DSA is the core of the new rules, an individual analysis for each country, which will be the basis of a spending path to be negotiated between the national government and the European Commission.

Another difference between positions is how much countries are allowed to deviate from the agreed path (and under which conditions), which in Darvas view matters even more than all these “numerical benchmarks” that were the focus of almost all of last year’s debate.

“Luckily, these additional safeguards are not that bad. They have a rather limited impact, and just in a few countries,” Darvas said, adding that probably Italy “would be the only country which would face trouble” with the deficit resilience safeguard.

“Much better than the old rules”

So, what follows from all of this? First, there is bad news for the Socialists.

“We don’t want to have new objectives for deficits or new austerity policies,” Socialist chief negotiator Margarida Marques (PS/S&D) said on Wednesday.

But Darvas said that “austerity will return”, noting that this had less to do with the deficit resilience criteria – and more with the EU treaties and their famous Maastricht criteria.

“There is no choice if a country like France has a budget deficit of almost 5% and debt at 110% of GDP, and the EU treaty requires a debt ratio of 60% of GDP and a budget deficit of no more than 3%,” he said.

“It’s the same for Italy, with a debt of debt at 140% of GDP,” he said. “It’s trivial that they will have to do fiscal adjustment.”

But “the big question is the pace of the fiscal adjustment,” Darvas stressed, “and in this regard, the new rules are much better than the old rules”.

In order to get everything done before the European Elections, Belgium wants to conclude negotiations “within a few weeks”.

So, if Darvas is right, this shouldn’t be too difficult – because the main course of action is already set anyway.

Chart of the Week

Europe’s industries are not having a good time.

Our “Chart of the Week” shows that while there was actually some recovery after the COVID-19 shock, industrial output is on a downward trend again.

Trade unions, who fear the loss of well-paid jobs for well-organised workers, sound the alarm, arguing that long-term investments are hit the hardest.

“We are facing a very worrying situation,” European Trade Union Confederation Confederal Secretary Ludovic Voet told Euractiv.

“Deindustrialisation is a clear and present danger, especially for energy-intensive sectors vital to downstream ecosystems,” said Tobias Gehrke, a Senior Policy Fellow at the European Council on Foreign Relations.

Our new economy reporter, Thomas Moller-Nielsen, has the story.

Graph: Esther Snippe. You can find all previous editions of the Economy Brief Chart of the week here.

Economic Policy Roundup

‘A really good step forward’: Experts praise EU anti-money laundering deal. EU institutions have agreed on anti-money laundering legislation that has been hailed as “a really good step forward” by anti-corruption experts. The deal, announced in the early hours of Thursday (18 January) morning, aims to clamp down on fraud and “protect EU citizens and the EU’s financial system” against the funding of terrorist groups and organised crime syndicates. Read more.

Ups and downs – but mostly downs – on platform work. The contentious platform work directive faces significant hurdles in moving forward, after most member states rejected a provisional agreement in interinstitutional negotiations in mid-December. So far, the Belgian presidency has announced it would use the provisional agreement as a starting point for future talks, but several countries, first and foremost France, are against anything that doesn’t stick to the Council’s general approach. The Presidency’s now committed to sharing a new text soon.

German liberals to compete with conservatives on anti-bureaucracy platform in EU election. German liberal party FDP (Renew) is pushing to cut red tape at the EU level in its campaign for the European elections, a step welcomed by business representatives but also seen as a diversionary tactic away from Berlin, where the liberals are part of the centre-left governing coalition. Centre-right EPP, meanwhile, has also reacted to the common complaints from the business community, making cutting red tape, too, one of its main priorities in a draft election manifesto seen by Euractiv.

Christine Lagarde denounces economists at Davos. The European Central Bank President accused professional analysts of constituting a “tribal clique” that only rarely interacts with or quotes other scientists. This, Lagarde said, has caused economists to discount the possibility of “exogenous shocks” such as pandemics, climate change-induced weather events, and sudden supply shortages – all of which have severely impacted Europe’s economy in recent years. Lagarde’s comments came on the same day that the EU confirmed that year-on-year eurozone inflation rose from 2.4% in November to 2.9% in December – pushing it further from the ECB’s 2% target rate. Read more.

German business model not fit for changing times? The 2023 bump in the German economy is not only a bump in the economic cycle but shows more fundamental problems with the German, and by extension, the European economic model, economists and business leaders argue. Read more.

Literature corner

EU competitiveness challenges during the green transition

EU Finances in Search of a New Approach

Where is the EU’s carbon price going?

Additional reporting by Théo Bourgery-Gonse and Thomas Moller-Nielsen.

[Edited by Alice Taylor]

Read more with Euractiv

'A really good step forward': Experts praise EU anti-money laundering deal

The Council of the European Union and the European Parliament have reached a provisional agreement on anti-money laundering legislation that has been hailed as “a really good step forward” by anti-corruption experts.