German debt reduction demands would be ‘straitjacket’ on EU, officials warn

German calls for tough debt reduction targets to be embedded in EU fiscal rules have hit stiff opposition from Brussels and a number of leading capitals, with officials warning they would stifle EU plans to modernise its budgetary policy.

Christian Lindner, German finance minister, reiterated his country’s demand for tighter fiscal discipline as he attended informal meetings in Stockholm on Friday and Saturday, saying he wanted a system that would include clear numerical benchmarks to deliver reliable reductions in debt.

Berlin has proposed that the debt-to-GDP ratios of heavily indebted countries should fall by 1 percentage point a year. For countries with less onerous debts, the minimum requirement would be a 0.5 percentage point reduction per year.

Lindner’s calls have caused deep concern among some EU member states, with one European Commission official dismissing them as being incompatible with proposals to create a more flexible system adapted to member states’ individual needs.

“It’s like baking a cake: you don’t put cement in it,” the official said, adding that Berlin’s proposals would make the new budgetary formula “inedible”.

Draft legislation unveiled by the European Commission on Wednesday seeks to usher in far-reaching reforms to the EU’s labyrinthine Stability and Growth Pact, giving individual states greater ownership of their individual debt reduction plans.

Member states and the European parliament are preparing to haggle over the details as capitals attempt to strike a deal on a revised framework by the end of this year or early in 2024.

Elisabeth Svantesson, the finance minister of Sweden, which holds the EU’s rotating presidency, said she was positive about the deal’s prospects. “Will it be easy? No. Will it be possible? Yes,” she told reporters.

The commission added extra safeguards to its draft regime in a bid to reassure Berlin that there would be minimum standards that member states must meet. These included a requirement that member states ensure their debt-to-GDP ratios are lower at the end of the initial four-year timeframe, compared with the most recent reading.

Countries with budget deficits above the Stability and Growth Pact threshold of 3 per cent will have to push through a minimum fiscal adjustment of 0.5 per cent of GDP a year — even if they are not yet formally in a so-called “excessive deficit procedure”.

Lindner said in Stockholm that Germany was playing a constructive role in the discussions, but added that if a deal could not be struck the old rules would apply.

Enforcement of the pact was suspended early in the Covid pandemic, but the commission has said it is likely to be reimposed next year. Brussels is eager to push through reforms quickly in a bid to avoid the imposition of unrealistic debt reduction requirements embedded in the old regime.

It wants to ditch an existing EU rule that requires a 1/20th per annum reduction in debt ratios by member states with debt above the EU’s 60 per cent of gross domestic product ceiling. The commission official said it was essential to get away from the old regime’s unenforceable “magical figures”.

Bruno Le Maire, French finance minister, challenged Germany’s proposals on Friday, warning against the imposition of automatic debt or deficit reduction requirements. “One size does not fit all,” he told reporters in Stockholm.

Reaction among traditionally hawkish members states has been mixed. While Austria has spoken in favour of tight safeguards, the Netherlands has opposed the kind of mandatory fixed minimum debt-reduction target that is being pushed by Lindner.