Why EU finance ministers face a tough balancing act

Good morning and welcome to Europe Express.

Gloom and doom is a sentiment increasingly felt in European nations, with the combination of soaring inflation, rising energy prices and the continuing war in Ukraine unlikely to abate any time soon. We’ll look at the conundrum faced by finance ministers when trying to come up with a solution, after their two-day meeting in Prague which ended Saturday.

Over in Strasbourg, it’s the EU parliament’s plenary week, with European Commission President Ursula von der Leyen scheduled to give her annual State of the Union speech on Wednesday. This will include details about the gas price cap and a windfall tax that were surprisingly endorsed by energy ministers on Friday.

Another commission proposal will be a ban on products made using forced labour. The FT has seen the draft law and we’ll explore the difficulties facing regulators in enforcing such a ban.

Later this week, MEPs are set to amp the pressure on the commission to withhold funds from Budapest (the budget commissioner himself recommended in July that a chunk of the country’s EU funds be suspended), with a debate and vote aimed at declaring that Hungary can no longer be ranked as a full democracy.

And we’ll look at the measures the government in Athens is taking to quell the growing public anger concerning energy bills.

Tightrope act

Eurogroup president Paschal Donohoe summed up the conundrum facing finance ministries in a closed-door meeting on Friday, writes Sam Fleming in Prague.

Imagine a shopkeeper whose business only just survived the lockdowns, the Irish finance minister told colleagues, according to people present at the meeting. Now, just as things are finally turning a corner, he or she suddenly faces a fivefold increase in energy bills. What should policymakers tell them? There needs to be a message of hope.

The problem is that there are no easy economic answers.

When Covid-19 sent the EU into a deep freeze, governments pumped hundreds of billions of euros of stimulus into propping economies up, helping tee up a sharp rebound when lockdowns eased.

This time finance ministries need to be far more careful, ensuring their interventions are targeted at vulnerable groups rather than spraying money in all directions and stoking up inflationary pressures.

They need to work hand-in-glove with the European Central Bank, which raised rates by three-quarters of a point on Thursday, rather than making its job harder. Failing to get the fiscal response right would force the central bank to jack rates up even higher.

Member state officials insist that this message was heard loud and clear during the meetings of finance ministers on Friday and Saturday.

There are, for example, no plans under way for a big new EU bazooka to complement the €800bn NextGenerationEU recovery programme (although there is a looming debate over whether to extend the period in which the recovery fund cash can be paid out beyond 2026).

And Christine Lagarde, the ECB president, said whereas just 10 per cent of interventions earlier in the energy crisis had been “tailored and targeted”, the figure was increasing to 15 per cent now.

But pressure on EU finance ministries to widen economic support, on top of an estimated €350bn of measures during the crisis to date, will only get more intense as the winter nears and the downturn worsens. Calls for helping households with their energy bills might soon broaden to other types of expenses, not just gas and electricity. Businesses, too, are asking for government support in growing numbers.

For finance ministries, keeping the economic response well-calibrated in a time of inflationary menace will be ferociously difficult.

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No easy task

In her last State of the Union speech, Ursula von der Leyen promised to ban goods made with forced labour within a year. This gave the commission’s trade directorate a tricky task to fulfil, writes Andy Bounds in Brussels.

Members of the European parliament were pressing von der Leyen for action after the US had decided to ban all imports from the Chinese province of Xinjiang, where it alleged Muslim Uyghurs and other minorities were forced into picking cotton and factory work.

However, the commission’s trade directorate generally eschews the unilateral measures deployed by Washington. Singling out imports would have faced possible challenges by countries at the World Trade Organization.

“The point is that, of course, forced labour exists in all countries,” said one EU official. Migrants can be trafficked into the EU, and anyone surrendering their passport to an employer after coming to pick fruit or vegetables is considered a forced labourer.

The commission proposal, rushed through to hit the president’s deadline of September 14, the State of the Union speech, required trade commissioner Valdis Dombrovskis and internal market commissioner Thierry Breton to work together.

Both admit that proving goods are made by forced labour is difficult: cotton from Xinjiang, for example, is often mixed in with other cotton in garments.

So Dombrovskis decided to use a test similar to the remedy used when exporters are suspected of selling goods below the cost of production. This allows Brussels to take action based on reasonable suspicion even if definitive evidence cannot be found.

As for what to do with seized goods (destroying them seems a waste, selling or donating them feels like rewarding exploitation), the commission has left it for national authorities to decide, as long as they don’t breach EU waste laws. “There are different views,” said an EU official.

And there will still be a battle with MEPs. The Green group is holding a press conference in Strasbourg today with Dilnur Reyhan, president of the European Uyghur Institute, calling for a sweeping ban similar to the US one. Tough negotiations lie ahead.

Greek measures

Greek Prime Minister Kyriakos Mitsotakis sought to assuage public anxiety over the weekend by announcing a €5.5bn relief package to tackle the energy crisis and increasing inflation, writes Eleni Varvitsioti in Athens.

Mitsotakis, who is facing elections next year and has come under increased criticism in recent weeks over a spying scandal, insisted that his country is ready for the winter. “We are ready for the worst possible scenario which is Russia halting natural gas flows,” Mitsotakis said in his annual economic policy speech in Thessaloniki.

He said that the country expects sufficient quantities of liquefied natural gas. Several power plants have switched to oil from gas, while coal-burning capacities have been increased.

Mitsotakis also announced a pension increase for the first time since the financial crisis hit the country more than a decade ago, and another minimum wage raise, the third one during his tenure. The monthly gross minimum wage (€713 per month) is lower than other EU countries and still not to its pre-crisis levels.

Greece exited its creditors’ surveillance last month, allowing the government more freedom in implementing its economic policy.

Mitsotakis said that the better than expected tourism period this year, provided additional fiscal room to continue funding power bill subsidies and also allowed for the abolition of a solidarity tax on private and public sector workers, which was established during the crisis years.

About 1.3mn families will be eligible for financial aid to cope with the increased energy bills. Mitsotakis also promised a €250 handout in December for vulnerable households, along with a €1.8bn plan to help young people to buy or rent a home.

What to watch today

1. European parliament in Strasbourg holds debate on Greek spying scandal

2. Secretary-general of EU diplomatic service, Stefano Sannino, speaks to media

. . . and later this week

1. Finnish PM Sanna Marin speaks to the European parliament in Strasbourg tomorrow

2. EU commission chief Ursula von der Leyen gives her annual State of the Union address on Wednesday

3. European parliament debate and vote on Hungary’s democracy Wednesday and Thursday

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