Business The EU Commission is fighting to raise debt for...

The EU Commission is fighting to raise debt for climate protection

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Brussels The European dream has turned green: Never before has an EU Commission set itself such ambitious ecological goals. This applies not only to President Ursula von der Leyen, but also to the two economic politicians in her college. “I will make sure to mobilize massive amounts of private and public funds to finance green change,” said Commission Vice Valdis Dombrovskis in a guest contribution to the Handelsblatt earlier this year.

EU Economic Commissioner Paolo Gentiloni is also committed to the environment. It was important to “recognize and take advantage of the opportunities associated with climate change”, said the Italian in his first programmatic speech in Brussels. The European economy is to become climate neutral by 2050.

All EU commissioners agree on the goal, but not on the way there. EU diplomats report that there was the first clash between Christian Democrat Dombrovskis and Social Democrat Gentiloni. The reason for the debate: the upcoming reform of the European Stability and Growth Pact.

The fiscal policy provisions of the 1997 pact have been repeatedly weakened in recent years. Now the Commission is again discussing a relaxation of the rules. Justification: The euro countries need financial scope for investments worth billions to reduce the CO2 emissions of their economies.

Gentiloni therefore wants to add a new flexibility clause to the pact, according to Brussels. Rising deficits and debts should therefore be allowed when it comes to government spending on climate protection.

Valdis Dombrovskis

The former Latvian prime minister is a Christian Democrat and is the Vice-Commissioner for the euro zone.


(Photo: Reuters)

Dombrovskis does not believe in such loosening exercises. “With a green golden rule, all possible expenses could be justified. That could trigger a dam break, ”said a senior EU diplomat.

For Dombrovskis, the argument is a kind of déjà vu. Even under the head of the commission Jean-Claude Juncker, he was responsible for the euro zone as commission vice-president and repeatedly collided with the then economic commissioner Pierre Moscovici. An Italian Social Democrat followed the French on December 1st.

Focus on public investment

Because Gentiloni acts more professionally than its predecessor, Dombrovskis gets on better with him personally, insiders report. But the political differences are the same as before: While Dombrovskis defends budgetary discipline in the euro zone, the economic commissioner focuses on public investment.

Gentiloni does the same. “The stability pact provides for deficits and debt ceilings, but the EU cannot force member states to push ahead with fiscal expansion,” complains the Italian. Highly indebted countries would have to put their national budget in order, but financially healthy countries should finally increase government spending.

Paolo Gentiloni

The EU economic commissioner is a social democrat and comes from Italy.

(Photo: imago / Pacific Press Agency)

So far, neither has worked: Italy, France and Spain have failed to get out of the debt trap despite the boom. In Germany and the Netherlands it was the other way round: they saved as much as they could and only hesitantly increased government investments.

The EU Commission is accordingly dissatisfied with the European fiscal policy and its regulations. On February 5, the Brussels authorities submitted an inventory of the Stability Pact – it will be very mixed. The decline in the average deficit ratio in the euro zone to 0.5 percent recently is not due to the Stabili Pact, but is the result of the good growth of recent years, according to Brussels.

In the problem countries – Italy, France, Belgium, Spain – the situation did not improve – on the contrary. Overall debt remained at a high level. The budget deficits of these countries have recently increased again and in some cases even exceeded the EU cap of three percent of annual economic output.

The widening gap between financially stable countries and highly indebted countries drives many EU commissioners. “The level of debt and the differences between our countries” are the main problem, says the new EU Industry Commissioner Thierry Breton. “My biggest concern is how we deal with the discrepancies and alleviate them,” says the Frenchman.

At the same time, the overall European growth potential is declining. Gentiloni predicts that the eurozone economy will grow only slightly by around one percentage point in the next few years after a growth rate of around two percent.

Both goals missed

The European Stability and Growth Pact therefore failed to achieve both objectives: it has neither stabilized public finances nor boosted growth. The fiscal policy rules of the euro zone do not have the desired effect. On top of that, they have become incomprehensible after the many interventions in recent years. Even experts can hardly understand the criteria used by the EU Commission to assess Member States’ budgets.

Indicators such as potential growth or structural deficits are opaque, critics complain. The European Fiscal Council, an independent advisory body to the EU Commission, proposed a radical simplification last year: The deficit limit should be replaced by a medium-term upper limit for primary government spending – a solution that Commission Vice-Dombrovskis could well get used to.

The Commission will probably admit on 5 February that the Stability Pact has become too complicated. However, opinions differ widely on the conclusions to be drawn from this. The Commission therefore decided to put the topic up for discussion first: The euro finance ministers should be clear about whether and which reforms they actually want. Only then will the Commission make a proposal. That will be the case at the earliest in summer, according to Brussels.

The new EU Commission is doing it very differently than the old one: Five years ago, President Juncker and his economic commissioner Moscovici did not find it necessary to conduct a survey of the member states. The two made their own decision to handle the pact more flexibly than before and introduced new exceptions.

Since then, Member States have been able to claim investment and structural reform expenditure to widen their budget deficit. Italy in particular made extensive use of the new flexibility clauses. Overdue structural reforms in Italy still failed to materialize. The vast majority of the euro countries did not use the new exceptions.

Old fronts are breaking open

Nevertheless, Gentiloni wants “to continue to take full advantage of the flexibility in the pact” in order to “promote a growth-friendly composition of public finances”. Of course, it is not certain whether his wish to further expand flexibility in favor of green investments will be fulfilled. There will be a discussion about this in spring in the Eurogroup.

It is unlikely that the Euro finance ministers will ultimately agree to add new exceptions to climate protection in the pact. EU diplomats expect that the old fronts between the south and the north will break up on the subject. Italy would vehemently fight for more flexibility and the Netherlands would also decisively oppose it.

graphic

Theoretically, the Commission could have acted without a mandate from the Eurogroup and could have handled the provisions of the pact more loosely than before. The fact that the authority decided against this indicates a change in the balance of power in the most important EU institution. Under Juncker, Dombrovski’s budget discipline struggled to assert himself – even when it came to possible criminal proceedings against deficit sinners like Italy.

After Juncker’s departure, his situation in the EU Commission seems to have improved. The new Commission President apparently stays out when her two economic commissioners clash. Von Leyen hardly took part in the internal debate about the green “golden rule” in the Stability Pact, according to Brussels. As a result, there could be a permanent standoff between supporters and opponents of lax budget rules – and then the Stability Pact would remain largely as it is.

More: With the coal phase-out, a second mammoth energy policy project has been carried out after the phase-out of nuclear energy. This could even be copied – a comment by Peter Altmaier.

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