Via Financial Times

Senior German politicians have warned Brussels against any attempt to loosen the EU’s budget rules in a bid to free up spending on green projects

The European Commission will on Wednesday kick off a drive for higher environmentally friendly investment when it unveils its Green New Deal. 

Among the questions being asked in Brussels is whether the region’s fiscal rules could be tweaked to make it easier for governments to borrow and spend on projects that curb emissions.

Paolo Gentiloni, the EU’s new economy commissioner, has said he wants to re-examine the region’s deficit rules, but any significant changes would be highly contentious, especially in frugal northern European states. 

In Berlin, Eckhardt Rehberg, the senior budget spokesman for Chancellor Angela Merkel’s CDU, said the EU’s stability and growth pact, which aims to control government borrowing, already provided enough flexibility to permit public investments. “We don’t need any more exceptions,” he said.

Hans Michelbach, an MP for the CSU, the CDU’s sister party, and the party’s main spokesman on budgetary matters, said: “Gentiloni’s plans are an attack on the stabilisation goals under the pretext of protecting the climate.”

Mr Gentiloni, an Italian social democrat, told Süddeutsche Zeitung this week that the stability and growth pact, which was focused on reducing the risks of sovereign debt crises, needed updating. “Now we have other challenges — the fight against climate change and the danger of low growth and low inflation for a long time,” he said.

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His officials have been conducting a review of the EU’s fiscal regime, but have not reached any conclusions.

Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics, said that given the environment of low interest rates and the imperative of confronting climate change, the time was right for reforms to make it easier for governments to spend on green priorities

“Of all the things you could do to reform the fiscal rules, this is the one that is the best politics and best policy,” he said. 

Lisa Paus, finance policy spokeswoman for the German Greens, said: “The coming reforms should be used to improve the incentives in the stability and growth pact for state investments. For example, it should be possible to write off investment spending over several years when calculating deficit quotas, just as with private investments.” 

Many politicians fear that an attempt to reopen the EU’s fiscal rules would open a can of worms, however. Whereas many northern European states favour a strict interpretation of the rules and automatic sanctions, southern governments with higher debt levels have welcomed flexibility and exemptions.

A diplomat from one of the fiscally conservative EU states said the commission would face significant resistance from a number of countries if it sought a formal overhaul of the rules to bolster green spending, even if minor adjustments permitted within the commission’s existing rule book would be less controversial.

Markus Ferber, the head of the conservative group in the European Parliament’s economy committee, argued that if the commission loosened the budget rules, countries with higher public debt burdens such as Italy and France would become “very creative” in relabelling their expenditure as sustainable. 

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“In the end expenditures are expenditures, no matter if they are green or not,” he said. “If a member state ends up at the brink of default, the market will not differentiate if the debt was used to finance supposedly green investments or not.” 

Additional reporting by Mehreen Khan in Brussels