Mint explainer: EU’s wine battle over budget

What are the financial rules of the European Union?

EU members are bound by certain financial rules set out under the Stability and Development Treaty. For example, the national debt cannot exceed 60% of GDP while the budget deficit cannot exceed 3% of GDP. These rules exist to rein in reckless spending by member states.

These rules have long been controversial among member states. While major players such as Germany see them as a means to promote stability, weaker members such as Italy and Greece are angered by the sanctions they see as a sovereign decision. However, Berlin quickly indicated that the solution to the economic crisis caused by excessive spending and the debt bubble would be borne by the German taxpayer. This was also the situation in the Eurozone crisis in early 2010.

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What is the latest controversy about?

The pandemic thinned even the most prudent states. Huge rescue packages were needed to keep national economies going and the constraints imposed by the Stability and Development Treaty were temporarily removed. However, these rules are set to go into effect back in 2023, much to the displeasure of some states.

Given the ongoing energy crisis and war in Ukraine, some leaders have suggested that some forms of spending should be exempted from EU rules. These include investments in renewable energy and national defense. Many countries, especially those that suffered after the 2008 financial crisis, do not want to return to the tight straitjackets imposed by Eurocrats in Brussels. Germany is pushing for a return to the way things were before the pandemic.

What is likely to happen?

It doesn’t seem likely that the continent will return to wholesale the old way of doing business. Given the security threat posed by Russia and the painful rise in energy prices, some countries have no taste for tighter spending controls. Many also believe that an ambitious climate and renewable energy agenda will require untold billions in public investment.

A more flexible version of the Stability and Development Treaty is likely to be introduced in the coming years. Experts anticipate that enforcement and advice from Brussels will be more akin to guidance than the directives they are currently looking at. Reform measures such as pushing back the retirement age may be rewarded with increased flexibility to spend.

Where does Germany stand in all this?

For years, German bureaucrats and politicians were the high priests of fiscal prudence in Europe. Now, they are increasingly making noise in the woods. German Finance Minister Christian Lindner is skeptical about loose spending rules and believes exemptions for climate spending will be exploited by cunning bureaucrats and politicians.

However, some people are listening to their warnings. Germany has pledged 100 billion euros to modernize its armed forces – these expenses will not be reflected in the country’s national accounts. Many in Southern and Eastern Europe, who want to spend equally, see this as a sign of German hypocrisy. France, another highly developed Western European power, is happy with the low spending regulations. This does not leave Berlin with good allies.

Many analysts are pointing to a fight over fiscal rules, a sign of how much Germany’s influence has waned.

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