War, crisis scenarios merit EU fiscal rule rethink, Portugal’s finance minister says

BRUSSELS ― The ink is barely dry on the European Union’s new spending rules for countries, but Portugal’s finance minister is already calling for changes to allow for more carve-outs.

The original revamp to the rules, which occurred last year after painstaking negotiations, opted to give more time to highly indebted countries in breach of European Commission limits to get their spending back in check. But there was a trade-off. The extended time frame came at the expense of flexibility as the Commission demanded countries precommitted to four- or seven-year spending plans.

Critics say this system straightjackets countries in the event of unforeseen events such as war or climate disasters, which require immediate fiscal responses.

In an interview with POLITICO, Portugal’s Joaquim Miranda Sarmento said Brussels should therefore look to adapt the rules around such “war or crisis” scenarios.

“[This past year] everyone has identified pitfalls or aspects that need to be improved or changed,” Sarmento said. He urged his fellow ministers to consider tweaking the rules as early as January.

According to the Portuguese minister, the EU’s spending rules should permit national capitals the “flexibility to address problems that are country-specific or problems that may arise or increase once you have already decided the rules.” Portugal is not alone in asking for changes to the current system.

Sarmento made the comments while in Brussels for a routine meeting of EU finance ministers this week discussing how to meet the bloc’s new spending requirements.

Political instability in the EU’s two largest economies ― Germany and France ― is currently keeping EU officials awake at night. The French annual budget is ensnarled in fraught negotiations over the formation of a new government, while Berlin’s outgoing coalition has yet to show Brussels its own plan to cut expenditures in the coming years.

The Commission nonetheless last month signed off on the multiyear spending plans of all 22 countries that submitted them for approval, with only the Netherlands and Hungary falling short.

Economic consequences of war

Southern European countries that have fallen short of NATO’s 2-percent-of-gross-domestic-product target for defense spending, such as Italy, support the idea of exempting military expenditures from national deficits to help fill the gap more quickly. Russia hawks such as EU Defense Commissioner Andrius Kubilius are also supportive.

While Sarmento did not explicitly heed such calls, he did say the current EU spending rules must “accommodate economic cycles and problems that are common to a large part of EU countries.”

The EU’s previous set of fiscal rules was introduced in 1997 and has been adapted several times since then.

Some believe political turmoil in Germany, where a fragile minority government is heading for an election in February, could provide those pushing for another shake-up in 2025 with an opportunity to start a debate about revisions.

“With [former German Finance Minister Christian] Lindner out [as of Nov. 7] it’s time to push for some red lines,” said an EU official granted anonymity so that they could speak freely. The hard-line Lindner led the negotiations last year.