Now even frugal Denmark opens up to common debt
The EU's timeframe is always long, even when issues demand urgent answers, as is the case with boosting competitiveness and increasing investment in defense. The Swedish presidency, which will lead the EU in the first half of 2023, has already made competitiveness one of its priorities. Thus, for months, there has been talk of the huge investments the Union will need to finance the double green and digital transition, to which defense has been added. However, it was former ECB President Mario Draghi who, in his report presented in September, provided a comprehensive diagnosis of the situation and quantified the Union's financial needs: 800 billion euros per year, between private and public funds. Draghi's work has set the pace, even if not all of his solutions are to the liking of EU countries. For the time being, defense is the most "neutral" ground on which it seems easiest to achieve convergence.
A year ago, it was Estonian Prime Minister Kaja Kallas (Renew), who now heads EU diplomacy, who first raised the possibility of common bonds to finance defense. She immediately won the support of French President Emmanuel Macron and other liberal leaders such as Belgium's Alexander De Croo. But whenever the issue was raised with more frugal countries, starting with Germany and the Netherlands, they insisted that Next Generation EU was a one-off. In recent days, however, Danish Prime Minister Mette Frederiksen admitted in an interview that she was "looking with fresh eyes" at joint debt and state aid to support the investments needed to defend and boost the Union's competitiveness. The front of frugal countries that have always opposed new joint debt is cracking, with the Nordics more inclined to revise their positions. Germany and the Netherlands remain the two most difficult stumbling blocks to overcome. It will be up to the German government that emerges from the February elections to make decisions on these issues. But it is clear that Berlin will then inevitably condition The Hague as well. Chancellor Scholz, even as Merkel's finance minister, has always been skeptical about Eurobonds, but in recent years Berlin has shown flexibility and pragmatism. And that is exactly what Frederiksen is calling for: "All countries, including a country like Denmark, which is usually part of the austerity gang," he said, "need to put aside knee-jerk reactions and see what Europe needs, and then we need to adapt the economy to that, not the other way around. And it is her way of acting across ideological fences that won Frederiksen the 2019 election, when as a Social Democrat she took a hard line on crime and immigration, issues usually reserved for the right that she rejected on the left: "An insecure society is always a bigger challenge for people without many opportunities. If you have money, you can always defend yourself," she reminded the Financial Times in an interview last February.
Falls taboo in Germany for reform to debt brake
In Germany, the greatest taboo has fallen. Now even the president of the Bundesbank, the temple of fiscal austerity and monetary orthodoxy, is calling for a reform of the debt brake. In an interview with the Financial Times, Governor Joachim Nagel succumbed to a "complicated" and "weak" scenario for Germany. And given the urgent need to gain more fiscal space to modernize Germany's infrastructure and invest in defense, the Buba chief said bluntly that "it would be a very smart approach" if the "debt brake" that harnesses public accounts, inscribed in the German constitution since 2009, were revised.
A revelation that comes in the middle of a discussion that has been going on for months. The inability to circumvent the debt brake after the Karlsruhe Constitutional Court's ruling last December rejecting 60 billion in extra-budgetary funds is the real reason for the long government crisis that led to early elections in recent weeks. Olaf Scholz's SPD and the Greens are in favor of the reform, while the Liberals are adamantly opposed.
