German finance minister urges EU to rein in public spending

The EU’s decision to suspend its deficit and debt rules for an extra year is not an excuse for member states to persist with loose spending policies, Germany’s finance minister Christian Lindner has said, in a call for more fiscal discipline.

“The fact that member states are now able to deviate from the Stability and Growth pact doesn’t mean they actually should do that,” Lindner told the Financial Times.

The Stability and Growth Pact, which enshrines the EU’s fiscal rules, was put on hold early in the Covid-19 pandemic as economic output in Europe crashed.

The European Commission was expecting to reimpose the rules at the beginning of next year as a post-pandemic economic recovery took hold. But the war in Ukraine and the consequent surge in energy prices has led Brussels to extend the suspension for another year.

Speaking on the sidelines of a meeting of G7 finance ministers in the Rhine town of Königswinter this week, he implied fellow EU countries should take a leaf from Germany’s book.

“We will not be taking advantage of the general escape clause [but] will return to our national debt brake, which is anchored in our constitution,” he said, referring to Germany’s strict ceiling on deficits.

The pact, which aims to keep member states’ borrowing under control, stipulates that public debt should not exceed 60 per cent of gross domestic product and budget deficits should not top 3 per cent.

Some member states have been advocating for reform, saying certain kinds of strategic government spending — such as investment in defence or mitigating climate change — should get preferential treatment.

But Lindner made it clear he opposed that, and warned against treating the suspension as an opportunity to rethink the whole EU rule book. “The decision to extend the escape clause shouldn’t be seen as a precedent or a prelude to reform of the fiscal rules,” he said.

He acknowledged that there was scope for “more flexibility” in the way they are applied, but insisted the EU needed a “long-term reliable path towards reducing state debt . . . In terms of our ultimate goal we should become tougher, not softer”.

With inflation on the rise across the G7 group of leading economies, Lindner argued that swift action was needed to return to macroeconomic stability and what he described as a “neutral fiscal stance”.

“There is a real danger of stagflation,” he said. “That’s why we have to act urgently.”

Lindner, leader of the liberal and pro-business Free Democrats, has the reputation of a fiscal hawk, though one with strong pro-European sympathies. He is an ardent proponent of returning to the debt brake as quickly as possible.

He has often warned that some countries in Europe had accumulated too much debt in the course of the Covid-19 crisis and must now make efforts to repair their public finances, especially against the backdrop of rising inflation in the eurozone.

“If you take a look at the data, you see that we need to stop our expansive fiscal policies and stop intervening in the market economy with these big state spending programmes,” he said. “We have to reduce our budget deficits and . . . send supply side signals for more growth.” 

Lindner also said he was opposed to the EU raising new debt to cover Ukraine’s financing needs, along the lines of the €800bn EU Next Generation Fund, which was designed to help member states rebuild from the economic crisis brought on by the pandemic.

“That was a one-time decision,” he said. “Germany does not support the idea of repeating the joint issuance of debt.”

He drew a distinction between calls for a new round of joint borrowing and the €9bn of financial aid the EU is discussing for Ukraine, describing the latter as “a different tool we’ve used in the past, based on national guarantees that are then used to jointly support third countries”.

Lindner also touched on a proposal that EU capitals should consider seizing Russia’s frozen foreign exchange reserves to cover the costs of rebuilding Ukraine after the war, which was floated earlier this month by Josep Borrell, the EU’s high representative for foreign policy.

He said Germany was “open” to the idea, but “we still need to figure out the legal issues and the consequences for the international rules-based order”. 

Lindner said he was against seizing the private assets of Russian oligarchs, however. “Countries based on the rule of law guarantee private property,” he said. “The hurdles for confiscating it are very high.”

He proposed that private actors such as oligarchs should be persuaded to “contribute towards reparations for Ukraine, on a voluntary basis”. “There should be a political discussion about that . . . which I would like to be part of,” he said.