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Show leniency on EU spending rules, says senior German MP

The EU should continue to suspend strict rules on borrowing and spending to help debt-mired countries like Italy until the pandemic is over, the new chairman of the German parliament's powerful EU affairs committee told AFP on Monday.

Published: 17 January 2022 15:27 CET

EU flags fly outside of the European Parliament buildings in Brussels. Photo: picture alliance/dpa | Michael Kappeler

Anton Hofreiter, a senior Green party MP, said Rome in particular deserved leniency as it finds its feet again after the blows levelled by Covid-19.

That flexibility should also extend to countries making ambitious expenditures in climate protection, he added.

Asked how the EU should help struggling countries, Hofreiter replied, “by continuing to temporarily suspend the Stability Pact because we’re really in a very special crisis”.

“We don’t know how long the corona crisis will continue,” he said, sounding a more conciliatory note than new chancellor Olaf Scholz of the centre-left Social Democrats.

“Under (Prime Minister Mario) Draghi, Italy has done a lot of things well in recent months. No one has an interest in it sinking even deeper into an economic crisis.”

The Stability and Growth Pact is a set of rules designed to keep member states in the black and ensure that governments don’t overspend.

The European Union temporarily suspending these fiscal discipline rules in 2020, allowing eurozone members to boost their public spending in response to the pandemic.

Italy’s public debt soared to 155 percent of its GDP — more than double the EU’s 60 percent ceiling — and Brussels has expressed concern that it is still budgeting to spend too much this year.

‘Smart proposal’

Hofreiter said the proposals of his party, junior partners in Germany’s ruling coalition along with the pro-business Free Democrats, for allowing greater investment in “green” projects were “very smart”.

Nevertheless, he said, some of the planks of the bloc’s Stability and Growth Pact, which dictates rules on debt and public deficits, “stand in the way of the Green Deal”, which aims to make the EU climate neutral by 2050.

French President Emmanuel Macron, whose country holds the rotating EU presidency, has joined forces with like-minded leaders such as Draghi to urge Brussels to reform its fiscal rules to allow greater investment spending while still managing debt levels.

Scholz, however, has tacked closer to Angela Merkel’s previous course of enforcing at least long-term fiscal rectitude — a potential source of friction in the government’s first 100 days.

By Deborah COLE and Martin TRAUTH

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Output is expected to expand 0.3 percent this year, the economy ministry said, up from a prediction of 0.2 percent in February.

The slightly rosier picture comes after improvements in key indicators — from factory output to business activity — boosted hopes a recovery may be getting under way.

The German economy shrank slightly last year, hit by soaring inflation, a manufacturing slowdown and weakness in trading partners, and has acted as a major drag on the 20-nation eurozone.

But releasing its latest projections, the economy ministry said in a statement there were growing indications of a “turning point”.

“Signs of an economic upturn have increased significantly, especially in recent weeks,” Economy Minister Robert Habeck said at a press conference.

The ministry also cut its forecast for inflation this year to 2.4 percent, from a previous prediction of 2.8 percent, and sees the figure falling below two percent next year.

“The fall in inflation will lead to consumer demand — people have more money in their wallets again, and will spend this money,” said Habeck.

“So purchasing power is increasing, real wages are rising and this will contribute to a domestic economic recovery.”

Energy prices — which surged after Russia’s 2022 invasion of Ukraine — had also fallen and supply chain woes had eased, he added.

Several months ago there had been expectations of a strong rebound in 2024, with forecasts of growth above one percent, but these were dialled back at the start of the year as the economy continued to languish.

‘Germany has fallen behind’

But improving signs have fuelled hopes the lumbering economy — while not about to break into a sprint — may at least be getting back on its feet.

On Wednesday a closely-watched survey from the Ifo institute showed business sentiment rising for a third consecutive month in April, and more strongly than expected.

A key purchasing managers’ index survey this week showed that business activity in Germany had picked up.

And last week the central bank, the Bundesbank, forecast the economy would expand slightly in the first quarter, dodging a recession, after earlier predicting a contraction.

German Economics Minister Robert Habeck

Economics Minister Robert Habeck (Greens) presents the latest economic forecasts at a press conference in Berlin on Wednesday, April 24th. Photo: picture alliance/dpa | Michael Kappeler

Despite the economy’s improving prospects, growth of 0.3 percent is still slower than other developed economies and below past rates, and officials fret it is unlikely to pick up fast in the years ahead.

Habeck has repeatedly stressed solutions are needed for deep-rooted problems facing Germany, from an ageing population to labour shortages and a transition towards greener industries that is moving too slowly.

“Germany has fallen behind other countries in terms of competitiveness,” he said. “We still have a lot to do — we have to roll up our sleeves.”

Already facing turbulence from pandemic-related supply chain woes, the German economy’s problems deepened dramatically when Russia invaded Ukraine and slashed supplies of gas, hitting the country’s crucial manufacturers hard.

While the energy shock has faded, continued weakness in trading partners such as China, widespread strikes in recent months and higher eurozone interest rates have all prolonged the pain.

The European Central Bank has signalled it could start cutting borrowing costs in June, which would boost the eurozone.

But Habeck stressed that care was still needed as, despite the expectations of imminent easing, “tight monetary policy has not yet been lifted.”

In addition, disagreements in Chancellor Olaf Scholz’s three-party ruling coalition are hindering efforts to reignite growth, critics say.

This week the pro-business FDP party, a coalition partner, faced an angry backlash from Scholz’s SPD when it presented a 12-point plan for an “economic turnaround”, including deep cuts to state benefits.

Christian Lindner, the fiscally hawkish FDP finance minister, welcomed signs of “stabilisation” in the economic forecasts but stressed that projected medium-term growth was “too low to sustainably finance our state”.

“There are no arguments for postponing the economic turnaround,” he added.