Migration Costs

Refugee Crisis Sparks Brussels Budget Debate

mogherini brok unhcr by action press
Calls began this week in Brussels to ease E.U. budget constraints to deal with the costs of the refugee crisis. On Wednesday, the E.U. foreign secretary, Federica Mogherini discussed the issue with Antonio Guterres, the U.N. high representative for refugee issues, and Elmar Brok, a member of the European Parliament.
  • Why it matters

    Why it matters

    The refugee crisis could lead to calls for a further softening of the Stability and Growth Pact, which could pose a risk to the euro single currency it was designed to protect.

  • Facts

    Facts

    • Austria and Italy want the cost of caring for refugees to be taken into account in E.U. budget deficit limits, in what would amount to yet another watering down of the Stability and Growth Pact.
    • The German government is opposed to such an exemption but in Germany too, regional politicians are calling for a relaxation of a national fiscal rule called the “debt brake” that commits federal and regional states to balance their budgets.
    • E.U. Commission President Jean-Claude Juncker, who is known for a flexible approach to the stability pact, may grant the exemptions Italy and Austria are seeking.
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    Audio

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“A country mustn’t be punished for being humane and taking in a particularly large number of refugees,” said Austrian Finance Minister Hans-Jörg Schelling.

His country and Italy, another front line state in the refugee crisis, want the European Commission to take the costs of caring for asylum-seekers into account in assessing whether their budgets meet E.U. rules under the so-called Stability and Growth Pact, a set of spending constraints imposed on countries using the euro single currency.

Germany, which demanded the set of austerity mandates back in the 1990s when the euro was created, is predictably against the idea. German government sources said the refugee crisis shouldn’t be mixed with deficit rules, and the finance minister, Wolfgang Schäuble, made his opposition plain to his E.U. colleagues at their last meeting.

But the proposal will be discussed anyway at the next meeting of E.U. finance ministers on October 5 and 6. The Germans may be fighting a losing battle. The E.U. Commission may well grant more budget leeway in response to the worst refugee crisis Europe has experienced since World War II.

Budget discipline is no longer the top priority in Brussels these days. Commission President Jean-Claude Juncker is focusing on economic growth and investments and has said the pact should be interpreted more “flexibly.”

In the current climate, budget rule-breakers don’t have much to fear from him.

Chancellor Angela Merkel needs French President François Hollande as a partner to tackle the Ukraine crisis and to find a common E.U. approach on refugees.

The plan to exempt the cost of caring for refugees from budget calculations is the latest in a long line of attempts to water down the pact.

Europe’s governments have shown extraordinary creativity when it comes to finding excuses for higher budget deficits and seeking exemptions from the debt rules.

In the summer of 2014, at the height of the Ukraine crisis, Romania’s budget minister wrote an email to European colleagues proposing that an increased defense expenditure be classified as “exceptional circumstances” and thus excluded from deficit limits.

His idea wasn’t accepted.

But many other attempts to soften the pact have been successful. In fact, the history of the pact is a catalog of exemptions from it.

In 2008, the European Commission excluded billions of euros spent on bank bailouts from the budget limit. Among the main offenders has been France. No other euro zone member has ignored the Commission’s spending restraints and calls for structural reforms with such consistency.

Hardly anyone in Brussels, the seat of E.U. government, still believes France will keep its promise to cut its budget deficit to below the E.U.-mandated ceiling of 3 percent of gross domestic product by 2017.

The chances of that happening are close to zero, Valdis Dombrovskis, the European commissioner for the euro, conceded behind closed doors, according to E.U. diplomats. The former Latvian prime minister believes France should be threatened with financial penalties. But sources in Brussels said Mr. Juncker is preventing him from taking that step, with tacit approval from Berlin.

Chancellor Angela Merkel needs French President François Hollande as a partner to tackle the Ukraine crisis and to find a common E.U. approach on refugees.

Earlier this year, the Commission for the third time extended the deadline for Paris to lower its deficit below the 3 percent threshold, on the condition that it use that time to implement structural reforms and reduce the structural budget deficit, defined as the deficit excluding cyclical factors. But nothing is happening.

 

Indebted Europe-01

 

 

The lax approach towards France is worrying the European Central Bank. France’s debt level has risen to more than 96 percent of its gross domestic product, for no proper reason. The financial crisis, which was the main cause of debt rises in countries such as Ireland, barely affected French banks at all, the ECB said in a recent analysis.

With France consistently off the hook, other E.U. members are demanding similar exemptions, for example Croatia, whose budget deficit is projected at 5 percent of GDP this year with public debt close to 90 percent of GDP.

“But the E.U. Commission may be unable do do anything about that now,” said Burkhard Balz, a member of the European Parliament from Ms. Merkel’s conservative Christian Democratic Union party. He added: “I can’t believe how the Commission is behaving on this.”

However, in Germany too, some of the 16 states say they need more federal money if they are to stick to the so-called “debt brake,” a self-imposed domestic initiative to eliminate structural budget deficits at the regional and federal level. The debt brake was hailed as a model for other E.U. countries to shore up the flagging Stability Pact with tough national rules on debt reduction.

“I don’t think the debt brake can be adhered to in all the regional states,” the governor of the state of Bavaria, Horst Seehofer, said at the weekend. “With the costs of accommodation, we’re already stretched to the limits.”

Marcel Fratzscher, the head of the German Institute for Economic Research, said: “I see no need for an exemption in the Stability Pact, neither for Germany nor for other European countries.”

Lars Feld, a member of the German Council of Economic Experts, an independent body advising the government, said: “The strong influx of refugees is no reason to tamper with the debt brake.” Maybe so. But that’s what is happening.

 

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Thomas Hanke is Handelsblatt’s correspondent in Paris. Axel Schrinner writes about tax and finance policy for Handelsblatt. To contact the authors: berschens@handelsblatt.com; hildebrand@handelsblatt.com; hanke@handelsblatt.com; schrinner@handelsblatt.com

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