German Socialist politician warns against failed EU debt rule talks

Much is at stake in the reform of EU debt rules, which could also threaten the very existence of the euro, Social Democrat MEP Joachim Schuster told Euractiv in an interview.

Read the full interview in German here.

The strict rules of the EU’s Stability and Growth Pact date back to the 1990s. Given the global crises that appear to have multiplied since the COVID-19 pandemic, a relaxation of the restrictive rules is under discussion in Brussels. The European Parliament already agreed on committee-level to a position in mid-December and will likely finalise it in January.

However, the member states are yet to agree in the Council, and it’s unclear whether a compromise is even possible.

Speaking to Euractiv, Joachim Schuster, the German SPD’s EU economics expert, believes that a failure of the negotiations would be “highly dangerous” and even put the euro at risk.

“The problem is that the financial markets could start speculating against the euro,” Schuster added.

This already happened during the 2012 financial crisis when the European Central Bank stepped in and bought government bonds itself to prevent them from falling in value.

This time, the situation is even more threatening and has gone unnoticed by the general public. Schuster argued that the current inflation and high interest rates would make a similar intervention of buying government bonds by the central bank very difficult.

“That’s why the pressure to come to an agreement is very high,” he added.

Schuster stressed that higher government debt is not really a problem, as for example the US is doing fine with around 110% of debt of their GDP and Japan has around 200%.

In Europe, however, “a minimum of coordination is needed. Otherwise, the eurozone risks being exposed to great tensions, and the euro would be difficult to maintain”.

Adjusting the ceiling

The current discussion on the EU’s debt rules revolves around a relaxation of the adjustment requirements, and this is “fully justified because there is absolutely no reason why a national debt of 60% should be dangerous,” Schuster said.

“The main problem is that the current adjustment mechanism says that if states have an excessive deficit, i.e. more than 60%, they should actually reduce this deficit in 1 of 20 steps and bring it down to 60%,” he added.

If states exceed their deficit of more than 60%, the current adjustment mechanism forces them to reduce it in one of 20 steps to bring it below the ceiling.

However, this is not feasible in the current situation because “for Italy, this would mean that they would have to cut their entire defence budget and their entire health budget in the first year alone,” Schuster said, adding that it would be an absurd idea.

Divided EU finance ministers to discuss fiscal rules as deadline nears

As EU finance ministers prepare to discuss once again the reform of the EU’s rules for national debts and deficits, the positions of hawkish countries and those calling for more flexibility remain wide apart, with little sign that a compromise is within reach.

EU investment fund

Schuster is also concerned that the current debt rules limit the ability of EU countries to invest in the future, which he believes should be significantly increased.

The new proposals would not allow enough flexibility, and this “could be blamed primarily on the EU Commission because its proposal does not take sufficient account of how investments can be made”.

Although the proposed new fiscal rules are much easier to comply with than the old ones, a significant increase in investments cannot easily be done, Schuster laments.

“There is enough money in the EU budget until 2027 because the reconstruction fund has to be spent first,” but a solution has to be found for the time after, Schuster added.

As such, “there will be no way around creating a European investment capacity or a European investment fund in the relevant order of magnitude of around one per cent of European GDP,” he said.

Schuster said he could imagine financing this through common European debt or considering taxes which can only effectively be raised on a European level.

Without such an investment fund, “in many countries, there will be no increase in investment in Europe”.

He admitted that the necessary investments in renewable energies could also be financed through additional levies on energy consumption.

“That would, of course, be possible, but it would be extremely socially unfair and would damage energy-intensive companies to such an extent that at least some of them would leave Europe,” Schuster warned.

Debt rules will affect the most vulnerable, EU trade union chief warns

The new EU rules for national debts and deficits will limit member states’ ability to act on climate change in a socially fair manner, the secretary general of the European Trade Union Confederation (ETUC), Esther Lynch, told Euractiv in an interview, warning against a return of austerity across the bloc.

[Edited by Alice Taylor/János Allenbach-Ammann]