EU debt rules for member states are “obsolete” and should be rethought to reflect the costs of 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 ballooned 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 state in Europe, in the eurozone, that has left its citizens on their own to face inflation? Not one,” Le Maire said in an interview. “This concept of ‘frugal states’ has been dead for a long time. The Netherlands are not particularly frugal. Germany is not particularly frugal. They spend as much as we do to protect their citizens from inflation.”
The French minister’s insistence on new economic thinking in the EU — given the need for big investments in renewable energy to tackle climate change and for more defence spending following the Russian invasion of Ukraine — contrasts with the more frugal views of Christian Lindner, the German finance minister.
Lindner said in May that the EU needed to become “tougher, not softer” in reducing public debt.
Le Maire conceded that the EU still needed limits on member states’ public debt and annual deficits, a set of requirements known as the stability and growth pact. But the rules — which have been suspended during the pandemic and which are supposed to limit a nation’s public debt to 60 per cent of gross domestic product — “should be rethought”, he said.
“The debt rule is obsolete, simply because you have a gap of more than a hundred percentage points between one country and another in the same monetary union [the eurozone],” he said.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 was important now, he added, was the trajectory of debt reduction.
The suspension of the stability and growth pact was extended until the end of 2023 because of the war and the subsequent surge in inflation. Germany’s public debt, at 69 per cent of GDP, exceeds the EU guidelines, while France’s has risen to 113 per cent, Italy’s to 151 per cent and Greece’s to 193 per cent, according to EU statistics.
Investors are growing nervous about EU economic stability. Recent rises in the spreads between the borrowing costs of different countries have triggered concerns about another eurozone debt crisis, 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 target of keeping budget deficits below 3 per cent of GDP. He said plans for France foresaw public debt falling from 2026 onwards and the deficit being cut to less than 3 per cent in 2027, compared with this year’s deficit forecast of 5 per cent.
Le Maire’s comments come as France seeks to pivot from a period of heavy government spending aimed at helping consumers and businesses through Covid-19 and inflation sparked by the war in Ukraine.
The finance minister, who has been a key member of Macron’s government since 2017 and runs a “super-ministry” of finance and industry, said an upcoming bill to blunt the impact of inflation would include more “targeted and temporary measures”, following €26bn of broader spending programmes 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 pledged to continue pro-business reforms and tax cuts that he said were aimed at achieving full employment, something that has eluded France for more than 50 years.
“Achieving full employment is the key to repairing France’s public finances. Getting there will require continuing to reform the labour market, unemployment benefits and training, as the president has promised,” he said. Changing the costly pensions system to raise the retirement age remained a priority, he added.
The government will need to hammer out compromises on each law with opposition MPs.
“Faced with this new political situation, we must stand firm and remain calm,” Le Maire said. “There are 164 deputies in parliament who are not of the far left or the far right with whom we are perfectly willing to work and who will allow us to strike compromises.”
The far left is pressing the government to pass a windfall profits tax — similar to those implemented in the UK and Spain — on energy companies that have prospered from the impact of the war in Ukraine and rising oil and gas prices.
Asked whether he would implement such a tax, Le Maire did not rule it out but said he wanted to wait until the end of the year to judge whether it was needed. “The burden of inflation must be fairly shared between the state and business,” he said, adding that he had already convinced companies including Total and container shipping group CMA CGM to make voluntary moves to blunt the inflation pain.
