Dutch warn against relaxing EU fiscal rules to spur defence spending

The Dutch finance minister has warned against watering down the EU’s borrowing rules by stripping out defence and other strategic investments, saying the bloc needed to keep its eyes on debt sustainability even as it confronts the economic challenges posed by the war in Ukraine.

Sigrid Kaag said that the Netherlands was open to discussing reforms to the Stability and Growth Pact, which sets debt and deficit limits for member states, but that removing military spending or green investment from the SGP, as suggested by some member states, would entail “significant risks”.

Shifting some investments “off the books” could damage the drive for economic convergence and debt sustainability, she told the Financial Times in an interview.

Kaag spoke amid calls in France and other member states for certain kinds of strategic government spending to get preferential treatment under a reformed SGP. Brussels is signalling that the pact may not get reimposed until 2024 — a year later than previously envisaged — given the damage to growth caused by Russia’s invasion of Ukraine.

The drive to reduce Europe’s reliance on Russian gas has ignited a further debate over whether the EU should undertake extra common borrowing to boost its energy investments.

Kaag, of the Dutch liberal Democrats (D66), is a former UN diplomat who served as trade minister and then foreign minister in the last government before taking up her post early this year. She is a pro-European who is expected by some officials to take a less hawkish posture on EU budgetary policy than her predecessor, Wopke Hoekstra of the Christian Democrats.

Kaag will set out her approach in a speech in Maastricht on Tuesday, after meeting with German counterpart Christian Lindner on Monday in Berlin.

The minister stressed that the Netherlands was open to new ideas for confronting the economic challenges posed by Russia’s war on Ukraine. While the government does not have a position yet on whether the SGP should remain suspended for another year, and it wants to go back to regular decision making, she acknowledged that “the war in Ukraine has shifted the paradigm”.

When it came to excluding certain categories of investment from the SGP, Kaag said the Netherlands was not saying a definitive “no, never”. But she warned: “We think there are significant risks, because you create parallel pathways and it doesn’t do justice to the real economic situation.”

A modernisation of the SGP could involve ensuring debt reduction was “viable and feasible” for countries with significant public debt burdens, she said. “But by placing investments off the books, we are not quite sure that is a solution to the serious problem of economic convergence and debt sustainability.”

When it came to the common EU response to the economic shock, she said it was “prudent and wise” to explore the scope within existing budgets to mitigate the effects of the crisis. But Kaag poured cold water on the idea of an immediate dash for extra EU debt issuance to battle the economic shock.

“Yes, it’s an understandable reflex to want to borrow more, but our very sober position would be, ‘let’s take stock, let’s find out how bad the damage is and where, and if and under which conditions assistance or compensation could be provided’.” 

Kaag stressed that while EU policy had been evolving rapidly, given the current crisis, it was still important to apply “appropriate processes and decision-making” rather than rushing through decisions that would have lasting consequences.

“In terms of crisis, one tends to sometimes overpromise and then underdeliver. I’m in favour of underpromising and overdelivering,” she said. “Keep calm and carry on, so to speak.” 

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