EU debt rules for member states are “outdated” and should be reviewed to reflect the costs of the pandemic, war and rising inflation, France’s finance minister has warned.
Bruno Le Maire said a “new economic model” was emerging in Europe as public spending rose and said any contrast between “frugal” northern EU member states, led by Germany, and profligate southern countries was no longer relevant.
“Is there a single country in Europe, in the Eurozone, that has left its citizens to face inflation alone? Not one,” Le Maire said in an interview. “This concept of ‘thrifty states’ has been dead for a long time. The Netherlands is not particularly frugal. Germany is not particularly frugal. They spend as much as we do to protect our citizens from inflation.”
The French minister’s insistence on new economic thinking in the EU — given the need for big investment in renewable energy to combat climate change and for more defense spending after Russia’s invasion of Ukraine — contrasts with the more conservative views of Christian Lindner, a German finance official. the minister.
Lindner said in May that the EU should become “tougher, not softer” in reducing public debt.
Le Maire acknowledged that the EU still needs limits on member states’ public debt and annual deficits, a set of demands known as the Stability and Growth Pact. But the rules — which were suspended during the pandemic and were supposed to cap the national debt at 60 percent of gross domestic product — “need to be rethought,” he said.
“The debt rule is outdated, simply because you have a gap of more than a hundred percentage points between one country and another in the same monetary union [the eurozone],” he said. What matters now, he added, is the trajectory of debt reduction.
The suspension of the Stability and Growth Pact was extended until the end of 2023 due to the war and the subsequent rise in inflation. Germany’s public debt, at 69 percent of GDP, exceeds EU guidelines, while France’s has risen to 113 percent, Italy’s to 151 percent, and Greece’s to 193 percent, according to EU statistics.
Investors are becoming increasingly nervous about the economic stability of the EU. Recent widenings in the spread between different countries’ borrowing costs have raised concerns of another debt crisis in the eurozone, with the European Central Bank agreeing to come up with new policies to counter any unwarranted sell-off in a country’s bonds.
Le Maire defended the EU’s goal of keeping the budget deficit below 3 percent of GDP. He said plans for France call for a fall in public debt from 2026 onwards and a reduction in the deficit to less than 3 percent in 2027, compared with this year’s forecast deficit of 5 percent.
Le Maire’s comments come as France tries to turn from a period of heavy government spending aimed at helping consumers and businesses through Covid-19 and inflation caused by the war in Ukraine.
The finance minister, who has been a key member of Macron’s government since 2017 and heads the “super-ministry” of finance and industry, said the upcoming draft law to cushion the impact of inflation would include more “targeted and temporary measures”, after €26bn broader spending programs including fuel subsidies and caps on retail electricity and gas prices.
Although Macron, who is starting his second term, has lost control of parliament, Le Maire has vowed to continue pro-business reforms and tax cuts that he said are aimed at achieving full employment, something that has eluded France for more than 50 years.
“Achieving full employment is the key to repairing French public finances. To achieve this, it will be necessary to continue reforming the labor market, unemployment benefits and training, as the president promised,” he said. Changing the expensive pension system to raise the retirement age remains a priority, he added.
The government will have to find compromises on each law with opposition MPs.
“In the face of this new political situation, we must remain firm and calm,” Le Maire said. “There are 164 MPs in parliament who are neither far left nor far right with whom we are perfectly willing to work and who will allow us to compromise.”
The far left is pressuring the government to introduce a windfall tax — similar to those in the UK and Spain — for energy companies that have prospered from the fallout from the war in Ukraine and rising oil and gas prices.
Asked whether he would introduce such a tax, Le Maire did not rule it out, but said he wanted to wait until the end of the year to assess whether it was necessary. “The burden of inflation must be fairly shared between the state and business,” he said, adding that he had already persuaded companies including Total and container shipping group CMA CGM to take voluntary steps to dull the pain of inflation.
