Germany ‘very skeptical’ over easing EU debt rules for green spending

Too many budget exemptions could lead to a ‘Pandora’s box,’ says top government adviser Jörg Kukies.

Germany ‘very skeptical’ over easing EU debt rules for green spending

PARIS — The German government is “very skeptical” that the EU can sustain its fiscal rules while allowing for more flexibility in green investments, a top adviser to German Chancellor Olaf Scholz told POLITICO’s Finance Summit Thursday.

Jörg Kukies, whose remit is both economy and the EU, said Berlin sees these so-called “golden rules” as a potential “Pandora’s box” in which individual countries would win so many budget exemptions they would render EU fiscal rules irrelevant.

The former Goldman Sachs executive’s comments come as capitals are debating whether to reform the EU’s rules for public spending, known as the Stability and Growth Pact (SGP). The rules, which cap budget deficit at 3 percent of economic output and try to limit public debt to 60 percent, have been on ice since the dawn of the pandemic but will come back into force from 2023.

The European Commission is preparing to propose reform measures this summer and some countries, particularly in the South, have called for the golden rule. Their concern is that the SGP is ill-fitted to support the post-pandemic challenges of climate change, especially for governments with high debt burdens.

The challenge is to reduce the bloc’s greenhouse gas emissions by 55 percent compared to 1990 levels by the end of the decade, a herculean effort that will cost around €520 billion a year — a tough ask for an indebted continent that’s recovering from the worst recession since the Second World War.

Waiving green investments from the deficit rule would allow governments to use taxpayers to fund the transition to a carbon-free economy. There’s no guarantee it’ll work though, according to Kukies.

Germany has already faced this problem at home, the 53-year-old said, and has found that “it’s impossible to agree on privileging certain expenditures over others.” Other EU member countries are already calling for spending carve-outs in sectors like defense and education, he noted.

An alternative to addressing the green shortfall is to shift the EU’s seven-year budget focus towards climate-neutrality, Kukies suggested — an idea that deputy finance ministers have recently floated as a possible solution.

Kukies’ comments follow POLITICO’s reporting that the Commission is considering easing formal debt rules once current exemptions expire in 2023 — a move that might run into resistance from some Northern capitals.

He also pointed to an area where the EU budget could find savings — by moving away from farm subsidies. He called it “a form of agriculture that needs overhauling in the direction of climate neutrality, to put it mildly.” The common agricultural policy is currently the largest spending component in the EU budget.

That said, Kukies added that Berlin is still open to negotiating certain “flexibilities” within the SGP, so that countries could boost certain kinds of investment without altering the framework’s “fundamental” structure, he said.