The (bad) politics of the pact

Dear readers,

Welcome to EU Politics Decoded where Benjamin Fox and Eleonora Vasques bring you a round-up of the latest political news in Europe and beyond every Thursday.

In this edition, we look at why national politics looks like it will stymie reform of the EU’s unloved Stability and Growth pact.

Editor’s Take: The (bad) politics of the pact

The trouble with sacred cows is that they are very difficult to slay. And the long overdue reform of the EU’s Stability and Growth Pact (SGP) looks like falling foul of national political symbols. 

The SGPs rules were first written in the early 90s after close to two decades of relatively stable economic waters across the EU. Their principles were left entirely intact by the economic governance legislation – known in Brussels as the ‘six pack’ and ‘two pack’ – that was hurried into law following the eurozone debt crisis in 2010 and 2011. 

The pact states that government budget deficits should not go above 3% of gross domestic product (GDP), and debt should stay below 60% of GDP. The debt ceiling is mostly logical, though Greece and Italy, with debt-to-GDP ratios of around 160% and 140% respectively will not be in conformity this century. Fourteen EU states currently have debt limits lower than 60%, despite the twin economic hits of the last three years. 

The deficit limit has always been harder to explain. In times of recession, governments are encouraged to increase spending temporarily in order to stimulate economic activity which, in turn, limits the scale of the recession and speeds the return to growth. The 3% deficit limit effectively puts governments in a straitjacket. 

It’s basic Keynesian economics – but few politicians were interested in economic logic during the debt crisis. 

The market turmoil caused by the bailouts for Greece, Ireland, Portugal, Cyprus and Spain encouraged liberal and conservative lawmakers to double down on the debt and deficit limits, imposing the threat of financial sanctions for breaching them, in a bid to prove to the markets that they were serious about budgetary austerity.  

Much of Europe, the south in particular, suffered deeper recessions and mass unemployment as a result of the austerity obsession. 

After that missed opportunity, the massive economic shocks caused by the COVID-19 pandemic and then Russia’s invasion of Ukraine threw the rules out of the window entirely. The Commission, sensibly, suspended the SGP in March 2020 just as Europe was going into the first COVID-19 lockdown. That suspension is set to be lifted in May. 

European Commission Vice President Valdis Dombrovskis set out modest plans to reform the SGP last November including a stronger focus on medium-term targets, specific rules for countries with particularly high debt levels, and a more country-specific application of the rules. All pretty modest stuff. The proposal for a so-called ‘green golden rule’ that would have allowed investments in a climate-neutral economy to be exempted from the spending limits, was conspicuous by its absence. 

Critics pointed out that the SGP’s rules on deficits contradict other EU commitments, many of them also hardwired into law, such as the massive investments needed in green energy and climate change mitigation and adaption. 

But even the Commission’s modest reforms are too much for some. Germany, which has always been one of the countries most squeamish about reforming the SGP, largely because of the scars left by the 1923-4 hyperinflation crisis in the Weimar Republic, now appears to be getting cold feet. Berlin’s finance minister Christian Lindner now insists that the Commission consult member states again before proposing any legislation. 

Nobody is suggesting that EU treasuries should go out on a debt-fuelled spending spree in perpetuity. The EU’s green energy transition will be cost-effective over time but needs upfront investment.

Leaving in place deficit rules that were designed for another era is both bad economics and bad politics.

Capitals-in-brief

Industrial drop saves Germany’s compliance with 2022 climate targets. German industry reduced greenhouse gas emissions by 10% in 2022 compared to the previous year, enabling the country to stay in line with its overall emissions target despite additional emissions caused by an increased reliance on coal-fired power generation. 

Dutch regional elections send shockwaves. The 15 March regional elections in the Netherlands saw an historic success for the self-declared agrarian interest party BoerBurgerBeweging (BBB), a relatively young party founded in 2019.

UK expected to ban TikTok from government devices. The UK is expected to soon ban the Chinese social media app TikTok from government devices, following in the footsteps of the US, Canada, Denmark, Belgium and the EU institutions.

Danish centrist party joins EU’s Renew. The recently-founded Moderaterne centrist party of former Prime Minister and current Foreign Minister Lars Løkke Rasmussen has joined the Renew Europe political group in the EU Parliament.

Portugal hopes Spain will focus EU trade on ‘Atlantic side’.  Spain, which takes over the EU Council presidency in July, could create “new momentum” for EU trade policy, particularly with regard to the trade agreements with Mexico, Chile and Mercosur, Portuguese Prime Minister António Costa said on Wednesday.

Czech courts convict nine people for endorsing Russian aggression. Czech courts have so far convicted nine people, most of whom received fines, for approving Russian aggression in Ukraine, the Supreme State Prosecutor’s Office announced on Wednesday. 

Croats are ‘the fattest nation’ in EU, health officials warn. Croats are the most overweight nation in the European Union, and the annual cost of treating related health conditions amounts to almost 3% of GDP, the national institute of public health (HZJZ) said on Wednesday.

Bosnia to get €70 million from EU for energy support, envoy says. The EU has earmarked €70 million for Bosnia-Herzegovina from its energy support package, most of which will be disbursed over the next two months to support vulnerable families and help companies improve energy efficiency, the EU envoy in the country said on Wednesday.

Inside the institutions

EU institutions silent over anti-abortion conviction in Poland. The European Commission and European Parliament President Roberta Metsola have refused to comment on the landmark Polish court decision to convict a woman for helping to provide another woman with abortion pills, while cross-party EU lawmakers denounced the verdict.

EU lawmakers ask UEFA to exclude Belarus from Euros qualifiers. European lawmakers called on Europe’s football governing body UEFA to ban the Belarusian national football team from the Euros qualifiers, in a letter seen by EURACTIV.

MEPs agree EU pesticide reduction plan votes, pushing final deal into 2024. European lawmakers finally agreed on a timeline to vote on their position on the EU’s plan to slash pesticides. But this leaves a final deal on the contentious file unlikely in 2023, as confirmed by a leaked draft of the Belgian presidency priorities. 

Market turmoil tests ECB rate hike appetite. European Central Bank governors will meet Thursday (16 March), with fears over a widening banking crisis testing their resolve to raise interest rates again by a half percentage point.

Brussels accused of backsliding on soy ban for biofuels. Environmental campaigners have accused the European Commission of trying to reverse the European Parliament’s decision to ban soy for biofuel production over fears that it could expose the EU to legal challenges at the WTO.

What we are reading

• We thought there were buffer states in Europe. Russia’s invasion of Ukraine has revealed they are frontier ones, writes Nathalie Tocci for Foreign Policy
• What if climate change meant not doom — but abundance? Writes Rebecca Solnit for the Washington Post
  
• Member states are taking more control — for better or worse? Writes Caroline De Gruyter for EU Observer

The next week in politics

• Leaders will gather for an EU Summit on the 23 and 24 March, where EU head of states will mainly discuss the current hot issues, such as the war in Ukraine, the economic outlook, energy, and migration.
•  At the Council, Agriculture and Fisheries ministers as well as Foreign Affairs ministers will meet on Monday (20 March). The General Affairs Council will take place on Tuesday (21 March), while the Tripartite Social Summit on Wednesday (22 March). Eurozone finance ministers will meett on Friday (24 March).
•  There are committee meetings at the European Parliament next week.

Thanks for reading. If you’d like to contact us for leaks, tips or comments, drop us a line at benjamin.fox@euractiv.com / eleonora.vasques@euractiv.com or contact us on Twitter: @EleonorasVasques & @benfox83

[Edited by Nathalie Weatherald]

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