Tensions flare over the EU’s new irresponsible big spender: Germany

What a difference a decade makes.

Ten years ago, when Europe was in the throes of the eurozone crisis, Germany led the drive for austerity. Now the rest of Europe is fuming about Germany’s heavy spending on energy subsidies that they fear could exacerbate the Continent’s politically explosive rich-poor divide. It hardly helps these growing tensions that it was Berlin’s misguided dependence on Russian gas that helped trigger the bloc’s energy crisis in the first place.

Dissent is growing in the EU — particularly in heavyweights such as Italy and France — about Germany’s massive €200 billion package announced last week to cushion consumers and businesses from the full effects of the energy crisis. These grievances now look likely to flare at Friday’s EU summit in Prague, when leaders will tackle the issue of rising energy costs and their economic ramifications. 

“Germany has shown a big middle finger to the rest of Europe with this package,” said one EU official. “That has really raised the temperature with the other countries.”

Germany’s deep pockets are a long-running bone of contention that also stoked problems during the coronavirus pandemic, when countries poured billions in rescue funds into their economies. The criticism is that Germany’s massive financial firepower allows it to bail out its economy, while poorer nations crack, opening up major divisions in the single market as German companies win a state-funded advantage over rivals elsewhere.

Nations say Germany has a burden of responsibility to show solidarity and not just look after itself — not least because of Berlin’s role in helping Gazprom establish dominance in Europe, and because Germany’s pursuit of new gas supplies is driving prices up for everyone. “The Germans are more worried about the supply of gas than the price, but for the other 26 countries it is not like that,” Italian Energy Minister Roberto Cingolani told Rai TV on Sunday.

Italian Energy Minister Roberto Cingolani | Stefano Guidi/Getty Images

In a slap on the wrist for the German go-it-alone approach, the European Commission on Monday also called on countries to coordinate their rescue measures and avoid undermining the single market. “Actions taken at national level have important spillovers on other member states, so a coordinated approach at the European level is more crucial than ever,” EU Economy Commissioner Paolo Gentiloni said on Monday following a meeting of finance ministers.

Even Italy’s outgoing Prime Minister Mario Draghi issued a rare rebuke of Germany. “We can’t divide ourselves according to our fiscal room for maneuver, we need solidarity,” he said late Thursday.

Guido Crosetto, co-founder of Brother of Italy, the party which is expected to lead the next Italian government, said on Twitter that Germany’s decision “not agreed, not shared, not communicated, threatens at the roots the rationale of the Union.” 

Paris also sounded annoyed.

“It is essential that we preserve the level playing field between the eurozone member states and between member states in general,” said France’s Finance Minister Bruno Le Maire, on his way into a meeting of eurozone finance ministers in Luxembourg Monday.  “If there is no consultation, if there is no solidarity, if there is no targeted support for business, if there is no respect for the level playing field, we risk the fragmentation of the eurozone.”

Adding fuel to the fire, the fact that Germany is blocking calls for an EU-wide gas cap to tackle the energy crisis is also not bolstering its cause among other countries.

Old habits die …. fast

Having been the poster boy for strict fiscal rectitude, insisting that austerity measures were part of the conditions of bailouts for countries such as Greece, Portugal and Ireland during the eurozone crisis, Berlin is now presiding over an eye-watering spending package. Even Germany’s own Federal Audit Court criticized the financing of the plan, as POLITICO first reported, which appears to fly in the face of decades of German fiscal conservatism. 

The announcement of the new package comes just weeks after German Finance Minister Christian Lindner told POLITICO in an interview that Germany and the EU must return to strict fiscal discipline.

But when it comes to the energy largesse, Lindner defended the move in Luxembourg on Monday. “The measures are proportionate to the German economy and until the year 2024, and in line with what others in Europe are doing,” he said.

Technically, the spending will be categorized under a COVID-era economic stabilization fund, so that it is compatible with Germany’s own national debt rules.

Germany’s decision to unveil an ambitious support package recalls the start of the COVID pandemic more than two years ago, when then-Chancellor Angela Merkel wanted to press ahead with plans to support its own economy. That led to accusations that Berlin was distorting competition across Europe because not all EU countries could afford such measures. Ultimately, the EU reacted by setting up its historic €750 billion coronavirus recovery fund, but the German government has repeatedly insisted that this was a “one-off” solution that won’t be repeated.

Former German Chancellor Angela Merkel | Pooled photo by Michael Kappeler/AFP via Getty Images

Then, like now, Germany had the fiscal room to shore up its economy. Others didn’t.

As French Commissioner Thierry Breton put it on Twitter:  “While Germany can afford to borrow €200 billion on financial markets, some other member states cannot. 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.”

Little sympathy for the Germans

Looming over the increasingly fractious debate about Germany’s newly discovered profligacy is the upcoming reform of the EU’s Stability and Growth Pact. The pact, the bedrock of the EU’s fiscal surveillance system, was put on ice during the pandemic. But the Commission is now poised to announce a revamp of the system, which would come into effect from 2024. 

While the twin bedrocks of the EU’s financial rule-book will remain — that countries need to adhere to public deficit of 3 percent of gross domestic product and a 60 percent debt to GDP ratio — the pact will include a new element of flexibility that seemed anathema a decade ago.  In particular, the Commission is proposing to remove the obligation for countries with a debt level higher than 60 percent of GDP to reduce their debt annually by 1/20th.  Countries would also be given more time to reduce their debt level. 

Much of the political momentum for revision of the Stability and Growth Pact rules has come from Paris. Last December, French President Emmanuel Macron and his Italian counterpart Mario Draghi called for the EU’s fiscal rules to be reformed to reflect “a new growth strategy” and ensure “enough key spending for the future.” The incoming Italian government is expected to echo the Draghi position, while even countries that flew the flag of austerity, such as the Netherlands, are tempering their demands for fiscal prudence.

There are also flashing warning signs about the state aid implications of the German bumper energy splash. The European Commission has stressed that it is up to any member state that introduces the measure to determine whether the spending constitutes state aid, and to notify this to the Commission. But a Commission official also stressed the importance of the level playing field and “horizontal rules that are applicable to all.” There is a temporary crisis framework in place, which allows flexibility under state aid rules to allow countries to help shoulder the economic burden created by the war in Ukraine. 

Margrethe Vestager, the commissioner in charge of competition policy, pledged to review the state aid framework this month to allow countries to counter the energy price crisis. It is unclear yet whether Berlin’s package would be assessed under the new framework, currently under consultation between Brussels and EU countries, or the old one.

Tobias Schwarz/AFP via Getty Images

The issue is likely to come to a head at an EU summit later this week, when leaders will discuss how to devise an EU-wide response to the energy crisis, and deal with the economic fallout of the Ukraine war.  

As Europe’s largest economy, what happens in Germany matters. But Berlin may find that it has limited sympathy from other EU countries at a time when many believe that a united response is the only way to tackle the enormous economic challenges expected this winter. 

Andrea Ferrazzi, a senator from Italy’s Democratic party, was categorical about the stakes.

He noted on Facebook: “If it continues moving in this direction we won’t have a united Europe anymore, but a hegemony of the strongest counties, with Germany first, which would weaken not only the EU but all the others.”  

Barbara Moens contributed reporting