Europe’s fiscal discussions heat up ahead of cold winter

Good morning and welcome to Europe Express.

The fiscal side of EU capitals’ response to the energy crisis is opening up old wounds, barely healed from the pandemic. We’ll look at how the discussions among finance ministers are shaping up, with gloomy forecasts for the months ahead coming in not just from banks and economists but also from weather scientists.

Ukraine continues to push back Russian troops despite Vladimir Putin’s illegal annexation of four regions — and EU ambassadors are seeking to sign off the eighth sanctions package this week, ahead of the Prague summit on Thursday and Friday.

And as Latvia, Bulgaria and Bosnia have held elections over the weekend, we’ll bring you the latest on how the war in Ukraine has influenced the outcome.

Fiscal discord

As is their custom, European finance ministers meeting in Luxembourg today and tomorrow will solemnly intone pledges to co-ordinate and synchronise economic policies for the broader good. But the reality is that economic policymaking is looking increasingly discordant, writes Sam Fleming in Brussels.

While central banks around the world are seeking to clamp down aggressively on inflation by lifting interest rates, European finance ministries have racked up a bill exceeding half a trillion euros as they pump money into schemes cushioning business and households from soaring energy prices.

Disparities in policy responses between EU member states are growing more glaring. Last week Germany unveiled a massive €200bn borrowing plan to create a “protective shield” for its households and businesses, using an off-budget facility previously used during the Covid-19 crisis.

The plan, announced on the eve of an EU energy ministers’ meeting that was meant to forge a common approach, antagonised member states that lack Germany’s deep pockets. Their anxiety echoes the mood during the early months of the pandemic, when southern member states looking to prop up businesses hobbled by lockdowns complained they lacked the kind of fiscal firepower that Berlin and other northern capitals could deploy.

Thierry Breton, the French commissioner who oversees the EU single market, was notably blunt on Twitter on Friday, saying that not all member states can borrow such handsome sums on financial markets, and that it was important to maintain a level playing field across the union.

“We need to reflect urgently on how to offer member states — which do not have this fiscal room for manoeuvre — the possibility of supporting their industries & businesses,” he wrote.

The latter was a reference to the idea of fresh common EU borrowing to funnel to hard-hit member states that are struggling to respond to the energy crunch.

As Europe Express has previously reported, there is already discussion among EU officials over the idea of reviving a Covid-era EU lending scheme called Sure that was originally deployed to backstop countries hit by rocketing jobless benefit claims. A rerun of the €800bn NextGenerationEU programme is less likely, given this was always pitched as a one-off affair.

Germany’s display of fiscal largesse has, however, triggered intensified discussions within the European Commission over the possibility of a more ambitious EU-wide borrowing plan to confront the current crisis.

Berlin’s move will also play awkwardly during the forthcoming debate over reforms to the EU’s fiscal rules.

As we report today, the commission is getting closer to settling on proposals to overhaul the Stability and Growth Pact, under which member states would get more of a say in laying out multiyear debt reduction plans in co-operation with the commission.

If a capital makes a strong enough case for space for extra investments, it could be granted extra time to put public debts on a declining trajectory, according to the ideas being discussed informally between the commission and member states.

Germany is expected to take a dim view of the idea that capitals can do bilateral deals with the commission to lay out fiscal consolidation plans.

But as Erik Nielsen, chief economic adviser at UniCredit Bank, points out, Berlin’s €200bn fiscal bazooka deploys a “fair amount of trickery” to ensure it remains compliant with the country’s borrowing rules. That ducking and diving could make it harder for Germany to press its customary case for fiscal rectitude during the debate over reforming the Stability and Growth Pact.

Chart du jour: Mind the gap

UK prime minister Liz Truss admitted yesterday that “mistakes were made” but vowed to stick to the tax cuts her chancellor had put forward. The “mini” Budget has reversed a 40-year trend of falling yields on government bonds, triggering a frantic sell-off followed by a stabilisation attempt from the Bank of England.

Election round-up

Three European countries held elections over the weekend, and the war in Ukraine shaped their projected results in different ways, writes Marton Dunai in Budapest.

• Latvia: The ruling centre-right party won most votes in parliamentary elections on Saturday, with prime minister Arturs Krišjānis Kariņš likely to stay on. But as his current coalition fell short of a parliamentary majority, Kariņš will have to persuade additional partners to join the government.

  None of the parties representing the Baltic country’s Russian minority managed to secure any seats in the parliament, which could widen the rift between Latvian-speakers and Russian-speakers. The war in Ukraine has led to a split within the Russian ethnic community: Support for Harmony, a pro-Moscow party, has dropped to 4.8 per cent after reaching nearly 20 per cent of the vote four years ago.

• Bulgaria: The fourth parliamentary elections in the past year and a half appeared to close inconclusively yet again last night. Exit polls put the centre-right GERB party of former prime minister Boyko Borisov ahead, without enough potential coalition partners for a majority. Borisov was in power for a decade until being ousted in 2021 after mass protests over alleged corruption, and espouses a less hawkish stance on Russia than his immediate rival, the staunchly pro-western former premier Kiril Petkov, whose party is expected to come in second.
  If the vote count confirms the exit polls, the most likely outcome is for pro-Russia president Rumen Radev to continue with caretaker governments and hold another election in a few months. This would expose the country, traditionally more Moscow-leaning than its neighbours, at a time when the EU is trying to hold a united line on Russia sanctions and on scarce energy supplies.

• Bosnia and Herzegovina: Polls closed in the Balkan country yesterday, in elections for the state presidency (representing each of the constituent ethnic groups — Muslim Bosniaks, Orthodox Serbs and Catholic Croats), as well as the parliament and the presidency of the Serbian part. The final count will only be known in the coming days but observers are confident that entrenched nationalists are likely to hold on to most levers of power.

  The US state department last month said it uncovered what it said were Russian influence operations, including illicit money flows, to the government of one of Bosnia’s three main groups, the Serbs — whose leader, Milorad Dodik, twice flew to Moscow to see Vladimir Putin in the past three months.

  “Putin has supported Dodik campaigns for a decade; before every election Dodik meets Putin, that is set in stone,” said Maxim Samorukov, a fellow at the Carnegie Endowment for International Peace. The war in Ukraine did not seem to make a difference to Dodik — though he has faced fierce opposition from a female economist, Jelena Trivić.

What to watch today

1. Eurozone and EU finance ministers meet in Luxembourg today and tomorrow

2. European parliament debates freezing a third of Hungary’s cohesion funds

3. Austrian chancellor, Serbian president join Hungary’s Viktor Orbán for a trilateral summit in Budapest

. . . and later this week

1. MEPs tomorrow are set to adopt a law for a single charger for mobile devices as of end 2024

2. EU and 17 non-EU leaders meet in Prague on Thursday for an inaugural security and energy-related summit

3. EU leaders stay on for an informal council in Prague on Friday

Notable, Quotable

Any deliberate attack on critical Nato infrastructure will be met with a firm and united response from Nato

• Protecting pipes: Jens Stoltenberg, Nato secretary-general, has warned against attacks on infrastructure in allied countries, as western authorities investigate leaks from the Nord Stream pipeline last week that they believe were caused by sabotage.

• Cancelling Peppa Pig: British cartoon series Peppa Pig became a point of contention in Italy’s recent elections, when a senior leader of Giorgia Meloni’s Brothers of Italy demanded that an episode depicting same-sex parents be banned. The incident is indicative of what is to come as Meloni seeks to put “the defence of the natural family” at the centre of her new government.