2023-08-18 19:58:17
Berlin/Brussels In the fall, negotiations on the reform of the EU debt rules will get serious. The EU finance ministers are likely to talk about the reform at their next meeting as early as September, even if the topic is not officially on the agenda. But time is pressing.
As if the negotiations weren’t politically difficult enough anyway, a new dispute over the reform has broken out among economists. The reason for this is statements by Robin Brooks, chief economist at the Institute of International Finance, an association of global banks.
Brooks thesis: the new debt rules proposed by the EU favor highly indebted Italy and disadvantage financially solid states such as Germany. And the EU consciously accepts that. The new EU debt analysis is therefore a “no go”.
With his criticism, Brooks provides Christian Lindner (FDP) in particular with new arguments. The Federal Minister of Finance is also critical of the proposals from Brussels. The only question is: Is Brooks right?
As a result of the corona pandemic and the energy crisis, the debts of the EU countries have skyrocketed. The old Maastricht rules, which stipulate a total debt ceiling of 60 percent and a maximum of three percent of gross domestic product for new education per financial year, are considered outdated in their current form. Also because they envisage debt reduction programs that countries like Italy cannot shoulder.
EU plans tailor-made multi-year debt reduction plans
In April, the Commission presented a draft law on how the Stability and Growth Pact should be reformed. The central innovation is tailor-made multi-year debt reduction plans that the EU Commission decides on individually for each country. These should mean that highly indebted countries such as Greece and Italy can also achieve their goals.
The reduction plans are to be based on a so-called debt sustainability analysis. Unlike before, not only the debt ceiling and the annual budget deficit are taken into account, but also many other factors such as the economic development of a country.
The current dispute revolves around precisely this debt sustainability analysis.
Critics, including the federal government, fear that thanks to the many parameters in the debt sustainability analysis, the Commission could calculate the budget situation in each country. The debt rules are being softened to such an extent that fiscal discipline is being jeopardized in some countries.
The ECB got out of German debt securities in particular
Economist Brooks goes even further with his criticism. He accuses the EU Commission of using manipulated figures to prettify the situation of heavily indebted countries like Italy. The policy of the European Central Bank (ECB) plays a central role in this.
Since the euro crisis more than ten years ago, the ECB has been buying government bonds from EU countries in order to stabilize their prices. Because the demand for debt securities increased as a result of the purchases, their interest rates fell, making it cheaper for the EU countries to borrow.
The ECB recently scaled back its purchases. In particular, she is getting out of German debt securities. But not from Italian ones. “The ECB is currently using maturing German government bonds to reinvest these funds in Italian government bonds,” explains Brooks.
While German debt securities are now reflecting the actual market value, the economist criticizes that this is “not the case” in Italy because of the ECB’s purchases. Nevertheless, the EU Commission would act as if the Italian government bonds influenced by the ECB would reflect the market value. In its debt sustainability analysis, it presents Italy’s financial situation better than it actually is.
Christian Lindner
The finance minister is a staunch opponent of the Commission’s plans to reform the EU’s debt rules.
(Photo: dpa)
Other well-known economists contradict this criticism. The director of the Bruegel Institute in Brussels, Jeromin Zettelmeyer, denies that the current risk premiums for Italy or Spain are too low. After all, they are still a few hundred basis points above those of the Bund and thus reflect a higher risk.
>> Read here: EU has to pay billions in additional interest
Of course, the ECB is helping Italy with its bond purchase, says the economist. In doing so, the central bank is only compensating for the negative effect that it created itself with its turnaround in interest rates. This is unique in the history of the euro. Therefore, it cannot be said that the interest rate differentials are inappropriate and do not reflect reality.
Former IMF chief economist Olivier Blanchard, now at the Peterson Institute for International Economics in Washington, argues similarly. “I don’t see any analytical or economic problem here,” says Blanchard.
The ECB’s bond-buying program has the declared goal of reducing the interest rate differentials between the bonds of the euro countries, he says. So the central bank is successful. However, this does not result in a fundamental problem for the debt sustainability analysis. The Commission must always make assumptions about how interest rates will develop in the future – and take into account any action by the ECB.
At best, there could be a political problem if German politicians criticized the fact that interest rates were being kept artificially low. But that has no effect on the accuracy of a debt sustainability analysis.
Fierce discussions about reform expected in the Council of EU finance ministers
However, Zettelmeyer still sees room for improvement in the Commission’s method. The Commission only makes a rough distinction between short-term and long-term debt, specifically with a term of less than or more than one year. “You could do that more precisely,” says Zettelmeyer.
>> Read here: Germany fears Lex Italia
The EU actually wanted to decide on the reform of the debt rule by the end of the year. Because then the stability pact should come into force again, which was suspended at the beginning of the corona pandemic. However, it is already foreseeable that the talks will drag on into the coming year because heated discussions are expected in the Council of EU Finance Ministers after the summer break.
Also because of criticism like that from economist Brooks, Zettelmeyer advocates that the member states take a little more time if necessary and discuss the Commission’s method in more detail.
“The methodology should be approved collectively. Otherwise the member states will later have the idea that the Commission will cook its own soup,” warns the economist. The discussion about the technical details will delay the agreement on new debt rules by a few months. But that’s worth it.
More: Federal Audit Office warns of EU debt reform
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