Common European funding backed by Brussels to counter the US’s multi-billion dollar strong Inflation Reduction Act is set to face an uphill battle with the bloc’s industrial heavyweight Germany as finance minister Christian Lindner takes a stance against a response that would entail any form of joint borrowing at the EU level.
With the US, China and other countries spending billions to bolster their industries and lure investors with expansive subsidies, the EU has come under increased pressure to act.
While the European Commission envisions a common European funding scheme – the sovereignty fund – to counter these developments, Germany has clarified that joint debts are not the way to go.
While German finance minister Christian Lindner emphasised that it might be “useful” to “bundle existing instruments”, he stressed that any instrument involving joint debts would be off the table.
“A sovereignty fund must not be a new attempt at joint European borrowing,” he warned ahead of the meeting of European finance ministers on Monday (5 December). “We see no reason for additional joint European debt,” Lindner added.
European Commission President Ursula von der Leyen outlined the centrality of the European sovereignty fund for a common European response to the Inflation Reduction Act only the day before.
“The logic behind is simple: a common European industrial policy requires common European funding,” she said on Sunday.
Relaxation of state aid rules
Along with the sovereignty fund, which should provide the firepower to counteract the US initiative, von der Leyen also called for a relaxation of the EU state aid rules. The push also received support from the German finance minister.
“More flexibility in economic aid for subsidies is to be welcomed, more agility and more speed anyways,” Lindner stated.
However, relaxing the state aid rules could be a double-edged sword. The restrictive rules ensure no country receives an unfair economic advantage in the single market by subsidising its industry.
A revamp of the EU’s subsidy rules could thus skew the single market, as countries with more fiscal firepower and lower debt ratios can outperform their European peers by spending more money.
For von der Leyen, the sovereignty fund is one of the core instruments to prevent this distortion of the single market. While member states should have the “flexibility to invest their budget in strategic sectors”, she stressed that “this approach cannot be self-standing.”
To avoid favouring “deep pocket states”, von der Leyen thus called for a “common European answer.” However, with the EU budget already stretched thin, a European response that could match the US inflation reduction act would only be possible via joint borrowing or increased spending on the national level.
Limiting government spending
However, the firepower of many of the EU’s member states is also limited by the EU debt rules, limiting government spending.
While Germany has considerable fiscal leeway due to its relatively low debt rate, other countries are less fortunate, with France, Spain and Italy all having a debt ratio of over 110% – a far cry from the 60% outlined in the EU’s stability and growth pact.
While European Commission presented its plans to reform the debt and spending rules to allow for more flexibility, the current proposal is not going far enough for Germany to ensure the fiscal prudence of the member states.
“The European Commission’s ideas for the Stability and Growth Pact are not the end of the debate; they are the beginning, at best,” Lindner said.
One of the cornerstones of the revamp of the debt and spending rules is to introduce individual plans tailored to each member state instead of a more general set of rules that applies to all member states.
However, the push is heavily opposed by the German finance minister, who once called himself a “friendly hawk.”
A European stability and growth policy must be based on “common rules that are identical for all,” Lindner stressed. “A bilateralisation of issues relating to the stability of our fiscal order […] would not be a reform that makes Europe as a whole stronger and more competitive,” Lindner added.
Source: euractiv.com
