EU Powers Skeptical of Budget Leeway for Energy Crisis Aid

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(Bloomberg) — Several European Union countries are expressing concerns about the bloc’s move to loosen budget rules as the Iran war squeezes markets, arguing the continent may be eroding its fiscal discipline.

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France and the Netherlands were among the countries that were critical during a euro-area finance ministers’ meeting on Thursday in Luxembourg, according to people familiar with the matter. Germany is also skeptical, the people added, speaking anonymously to discuss private conversations. 

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Others, including Spain, defended the tactic, which would let countries redirect unused flexibility for defense spending toward energy aid as fuel prices spiral. 

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Publicly, finance ministers said they want to learn more about the proposal.

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“We will now wait for the concrete proposals, we will evaluate them, but we are paying attention to defense spending, we are paying attention to financial stability,” German Finance Minister Lars Klingbeil told reporters before the meeting.

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The tussle highlights the EU’s difficult position. Officials want to help people facing rising costs as the Iran war drags on and the Strait of Hormuz, a vital commercial shipping route, remains closed. But there is anxiety about allowing countries to pump more money into the economy and accelerate inflation.

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The European Commission, the EU’s executive arm, proposed the idea last week, bowing to pressure from leaders including Italian Prime Minister Giorgia Meloni.

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The commission’s offer would only grant flexibility for green-energy spending, allowing countries to deploy up to 0.3% of gross domestic product annually toward these efforts through 2028 — capped at a maximum of 0.6% over a three-year period. 

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The move has faced scrutiny from entities like the European Fiscal Board, the EU’s budget watchdog, which argued on Wednesday the leeway could drive up consumer prices and undermine the bloc’s revamped deficit rules. 

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Despite the criticism, capitals expect the proposal will move forward and are pressing the commission to proceed cautiously, the people said. 

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A spokesperson for the Dutch government declined to comment. Spokespeople for the Spanish and French governments did not immediately reply to requests for comment. 

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A French finance ministry official previously called the commission’s proposal slightly worrying. 

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European Central Bank chief Christine Lagarde on Thursday reiterated that fiscal responses to the energy price shock should follow the three Ts: ”temporary, targeted and tailored.”

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“Fiscal sustainability is a crucial anchor for broader economic stability,” she told reporters, following the ECB’s decision to hike interest rates to combat rising inflation from the Iran war.

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Eurogroup chief Kyriakos Pierrakakis defended the flexibility as “merited,” arguing it is part of preserving the continent’s security.

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“This is a flexibility that comes on top of the existing one, which we allowed for defense,” he told reporters on Thursday. “At the end of the day, this also touches upon security.”

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—With assistance from Alessandra Migliaccio and William Horobin.

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