With Donald Trump elected to a second term as US president, the EU needs to spend more on defence, and doing so requires new public debt, experts told Euractiv. The exit of fiscal hawk Christian Lindner (FDP, Renew) from the German government could open up new opportunities in that direction.
Among the political events that shook Europe this week, Trump’s victory on Tuesday (5 November) is poised to carry the most far-reaching and consequential implications.
“Of course, we need to see the policies [that Trump will take],” Maria Demertzis, Chief Economist, The Conference Board Europe, told Euractiv. But from a European perspective, “two things stand out,” she noted: “defence and tariffs”.
On defence, there will be no way around shoring up Europe’s own defence spending, given the “uncertainty” that Trump has left over the future of Ukraine and his commitments to the NATO alliance, Guntram Wolff, senior fellow at Bruegel, agreed.
“The amounts we’re talking about now are in the three-digit range,” Wolff said, citing the €500 billion figure Commission President Ursula von der Leyen estimated in June will be needed over the next decade.
“And you won’t be able to simply cut this out of the current budget by saving a little on agriculture,” Wolff said. “So there will have to be additional national means and there will also have to be debt, from my perspective,” he added.
„Wars are never financed from the current budget: they always involve debt financing,” he said.
While the question on whether to finance this via national or EU budgets was ultimately “political”, for Northern and Eastern Europe using EU funds would have the advantage “that the burden is shared across the entire EU and not just between the North and the East,” he noted.
Demertzis similarly said that “if you want to do more on defence, the two options are: Either we issue new [EU] debt, or we exempt defence spending from the national budget [under EU fiscal rules]”.
German government overhaul a positive for new EU funding prospects?
Re-opening the EU’s fiscal rules – an eternally politically divisive item that imposes spending limits on national governments – could be a complicated task, as demonstrated by the level of negative attention the issue received at Valdis Dombrovskis’s hearing for Economy Commissioner on Thursday (7 November).
Consequently, Demertzis’ “preference would be for common debt,” she said.
Indeed, the option for new EU funds seems to stand a better chance in light of the second big development of the week: German Chancellor Olaf Scholz firing his Finance Minister Christian Lindner – a staunch fiscal hawk – on Thursday (7 October) and asking to hold a confidence vote in January, with a view to possibly go to snap elections by the end of March.
The country’s government crisis broke out after political and industry leaders warned against the potential ramifications of political instability for the already delicate state of the domestic economy.
On Wednesday (6 November), Scholz had already dismissed his coalition partner, citing Lindner’s opposition to loosening the country’s ‘debt brake’ for an emergency measure on Ukraine as a reason for the government collapse.
Conservative opposition leader Friedrich Merz (CDU, EPP) – currently in a strong position to win the upcoming elections – promptly declared that, in the long run, he would be open to talk about “almost everything” on defence issues – though he noted that before that, questions like European coordination of procurement and scale would need to be addressed.
Economic News Roundup – It’s all about the hearings!
It was Slovakia’s nominee for trade Maroš Šefčovič’s onus to open the Commissioner hearings week on Monday (4 November) – with some strong high-level statements on the US and China finally earning him support from the Parliament. Šefčovič pledged to MEPs he would “fight” for ensuring a level playing field with China – and „stand up” for Europe’s interests if „faced with disruptive scenarios” after Tuesday’s US presidential elections. During an often tough parliamentary hearing, the Slovak nominee switched to stronger posturing on Europe’ trade needs vis-a-vis the US and China – leaving behind the more moderate tone he struck two weeks ago in his written answers to MEPs. „It’s time to double down on our efforts to safeguard the level playing field: EU industries must get a rapid and effective relief when faced with dumped or unfairly subsidised imports, non-market overcapacities or negative spillovers from foreign industrial policies.” He also pledged to make „assertive use of our robust system of trade defence instruments while ensuring that our response is legally sound and that everyone is on board,” adding he would assess „the extent to which the EU should review these instruments.” Meanwhile, he vowed to lead a “reform” of the WTO „including by investing on the plurilateral track” – i.e., by opting in agreements on a voluntary basis in order to get more pacts over the line – and noted that the US’s failure to nominated appellate judges meant that when nations appeal a WTO decision they are simply “appealing the cases to the void”. Šefčovič also embarked in another hot topic, by hinting the Commission is looking to progress as quickly as possible on the 20-years old Mercosur negotiations: he said the Commission’s trade department will “debrief” the Parliament’s international trade committee on 11 November in a technical meeting – ahead of the G20 summit in Brazil on 18 November. “But once we know the negotiations are in the final phase, then, as I promised you, I will come to see you with a power point, with a calculator, with all the necessary data,” he continued, “and I will plead for having the discussion on data and figures,” he said. Read more.
On Wednesday’s, it was Portuguese Maria Luís Albuquerque’s turn on the Parliament’s hot seat – as she faced harsh scrutiny from MEPs over her recent work for private investment firms. Questions around conflicts of interest proved particularly pertinent for Albuquerque, who went from spearheading post-crisis austerity measures as Portuguese finance minister to working for companies that profited from buying into some of the country’s distressed assets. It is no coincidence that the more pointed questions to the EPP candidate came from two left-wing Iberian MEPs – Spain’s MEP Jonás Fernandez (S&D) and Portugal’s Catarina Martins (The Left) – whose recollections of the European sovereign debt crisis seemed very fresh a decade later. Albuquerque, however, seemed to field those questions with the poise of a long-standing government official, rather than the defensiveness of a senior financial firm employee. She stressed that, at both Morgan Stanley and Arrow Global, she acted as non-executive director – a position she described as „closer to the role of a regulator than the role of an executive.” She then defended operations she carried out during her public roles as having been thoroughly examined by multiple legal committees – and emphasised she has “always been committed to loyally serving the public interest,” and will continue to do so. Echoing her previous preliminary written answers, she then said that the painful emergency measures countries had to undergo during the crisis years motivated her to foster better prudential regulation: „That’s why I’m the strong defender of the banking union. Albuquerque’s focus on banking regulation was closely linked to her repeated statements that her policy priorities will revolve around financial stability – in line with the tone of her written answers to MEPs last month. She pledged to deliver final legislative compromises on the stalling Crisis Management and Deposit Insurance (CMDI) legislation, and the interlinked measure for setting up an EU-wide Deposit Insurance Scheme (EDIS) – the latter of which continues to face staunch opposition from some member states. Other key pledges included taking a global leadership role in finalising the full application of the Basel III framework, and assessing potential lingering risks in the securitisation market and the so-called shadow banking sector. On the Capital Markets Union (CMU) agenda, she also sought to reassure those who questioned her hints (in her written answers) at a more centralised supervisory system. She stressed that, while boosting integration of market supervision will take centre stage in her policy plans – she will “not be fundamentalist on how to get there.”
Finally on Thursday, two big policy portfolios – budget and economy – were in the Parliament’s spotlight. Latvia’s Valdis Dombrovskis’ vigorous defence of the EU’s new fiscal rules during his hearing at the Parliament on Thursday (7 November) proved convincing enough to earn him a third term at the EU executive. Defending his long-held belief in the bloc’s fiscal stability framework, the veteran politician and Brussels insider noted in his opening remarks that the so-called New Economic Governance Framework, which came into force in April this year, offers member states greater leeway to make “growth-enhancing” investments but will also “reinforce market confidence” by “ensuring fiscal sustainability.” His insistence on the centrality of the bloc’s fiscal rules, however, attracted plenty of attention among MEPs – and not of the good type. Lawmakers from opposite sides of the political spectrum seemed equally concerned about the risk the recently reformed EU rules would put a chokehold on member states’ ability to focus on the right priorities – especially those from France, where a tricky government budget crisis broke out after the EU opened an excessive deficit procedure on the country. Fielding particularly pointed questions from Manon Aubry (The Left) and Pascale Piera (Patriots for Europe), Dombrovskis defended the Commission’s role in “applying the rules of the Treaty” – arguing “EU rules don’t appear out of nowhere: what we are applying is what has been commonly agreed” by member states and the Parliament. He also went as far as saying an EU wealth tax was not off of the table in the future: “Indeed, at the global G20 level, there’s a debate on a wealth tax – and we’ll be part of that debate.” Tasked with a “double” portfolio overseeing the bloc’s economy and productivity, and implementation and simplification, Dombrovskis was also pushed by Danish MEP Kira Peter-Hansen (Greens) to elaborate on his own views on how the EU should boost public investment. Dombrovskis largely dodged the question, arguing that this discussion is primarily a question for the next Multiannual Financial Framework (MFF), or regular EU budget, negotiations for which are set to begin next year. However, he added, “no option is off the table”. “The important thing is to agree on how much to finance and which areas [we need to finance],” he said – which could be through greater national contributions to the MFF, more joint common debt, or new “own resources” for the EU.
Meanwhile, Poland’s centre-right nominee Piotr Serafin was confirmed as the new Commissioner for budget after doubling down on the need to reform EU spending while also championing regional governments’ pivotal role at his MEP’s grilling session on Thursday (7 November). During his hearing, Serafin argued that simplifying EU spending would primarily benefit those currently receiving EU funding, who often have to go through a lot of paperwork. “Accessing EU funds does not have to be a bureaucratic nightmare,” he said, while also mentioning that different rules across different funds are one reason for a recent increase in spending errors. “We should work on it,” he committed. Serafin highlighted that his main task as commissioner would be to “assist” President Ursula von der Leyen (to whom he will report directly) to set out the EU’s next seven-year budget – hinting at the fact that much of the decision on future EU spending will be in political leaders’ hands. He also emphasised the need to reform the MFF, the long-term EU budget, tuning into an ongoing debate on how it should be structured. Asked about the future size of the EU budget, Serafin said it might have to go beyond the traditional size of 1% of the EU’s gross domestic product (GDP), in his „personal view”, but did not want to commit to any numbers on future spending. On the question of new sources of revenue for the EU budget, aside from contributions from national budgets, Serafin highlighted that the Commission already made proposals to establish so-called EU “own resources” after a political agreement with member states and the European Parliament in 2020. He said that negotiation progress within the Council on the proposals has been “insufficient.” „We should push and convince the member states to go in the direction” of adopting the existing proposals, he said. “This is the proposal that is on the table, and I have no Plan B,” Serafin said. “I have only Plan A, and I want to push that Plan A.” He also did not shy away from taking a clear stance on the tricky debate on the centralisation of cohesion policy. Regional governments “know best what reforms and investments they need,” Serafin said. Regions “know best how to plan economic developments, and (…) can do it much better than the central governments,” he added.
In other news
European leaders will agree a significantly watered-down statement on the bloc’s “Competitiveness Deal” in Budapest today (8 November), with key proposals relating to financial integration, the EU budget, and research expenditure stripped from European Council President Charles Michel’s ambitious original text. The final version, seen by Euractiv, omits the original document’s call for member states to complete the long-delayed Capital Markets Union and Banking Union by 2026 and a „genuine Energy Union” by 2027. It also removes any mention of the need to „eliminate cross-border barriers” in the telecommunications sector, harmonise member states’ insolvency laws or achieve greater “convergence” on financial supervision and taxation. Read more.
France’s deputy minister for industry, Marc Ferracci, called for introducing “emergency” measures to save Europe’s struggling carmakers on Tuesday (5 October), including postponing potentially large fines they are likely to face next year.“The Commission should think of postponing the fines that could be paid by car manufacturers in the framework of the [CO2 standards for cars],” he told reporters in Berlin. Ferracci’s statements come after car-producing countries Czechia and Italy announced over the weekend they will push for a delay of the fines. While they hope car giant Germany will join their call, Bernhard Kluttig, director general for industrial policy at the German Economy and Climate Ministry, said that there was “not a definitive position within the German government yet on how to deal with the emissions fines” – but noted that he wanted to “keep the CO2 targets” and help the industry “cope”. Read more.
EU finance ministers reaffirmed their commitment to pursuing a business-friendly approach to boosting the bloc’s flagging competitiveness on Monday (4 November), emphasising the need to cut or modify regulations to incentivise private investment and facilitate scale-ups. In a statement, ministers called for „well-calibrated structural reforms” to encourage the private sector to help address the bloc’s significant investment needs, which some estimate to be in the region of €800 billion per year. They also stressed the importance of reducing companies’ „growing regulatory burden, [which] is becoming an increasingly important obstacle for companies, in particular small businesses, to innovate, scale up, and grow,” it added. Read more.
