Bundesbank Defies ECB Support of EU Commission Governance Reform Proposal

24 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The Bundesbank issued a critical opinion of the European Commission’s proposals for new EU economic governance rules, contrasting with the European Central Bank’s positive assessment of the plans.

In its monthly report, the Bundesbank said that ‘the rules are at risk of being significantly weakened’ in the Commission’s draft reform. In its recent monetary policy statement, the ECB had said, ‘we welcome the publication of the European Commission’s legislative proposals’.

According to the Bundesbank, the new proposal ‘increases the danger that member states will only gradually reduce high debt ratios.’

The enhanced role of the Commission in the new proposals, which ‘has a broad scope of tasks and does not solely pursue the goal of fiscal solidity’, would ‘inevitably lead to conflicts of interest’, the Bundesbank said.

The new country-specific targets included in the draft reform would be based upon ‘complex and heavily assumption-driven sustainability calculations’, according to the Bundesbank. This would make the rules ‘more difficult to comprehend.’ Furthermore, ‘public perception may suffer, and an important control mechanism could be lost as a result.’

ECB President Christine Lagarde previously voiced support for the idea of country-specific targets. Speaking at the Eurogroup summit in Stockholm in April, she said ‘compared with the current framework, we welcome the fact that the reform proposals aim for more national ownership.’

 ‘The ECB really values the work that has been done’ on the Commission draft, she said, adding: ‘we truly appreciate the Commission’s effort to reach a compromise with member states.’

In contrast to the Bundesbank’s view that there was ‘the danger that member states will only gradually reduce high debt ratios’, she said the ECB welcomed the fact that ‘there is a stronger focus on high debt levels and medium-term perspective that also aims to set incentives for investment and reform.’

‘What the ECB also values is the stronger enforcement that is embedded in the proposal’, she said.

The EU's economic governance framework includes rules for managing fiscal policies, including the Stability and Growth Pact, which sets limits on government deficits (maximum 3% of GDP) and debt levels (maximum 60% of GDP). The rules were suspended in the aftermath of the Covid-19 pandemic, and although they are set to be reintroduced next year, the EU has expressed a desire to reform them as national budgets have ballooned in the aftermath of the pandemic and the energy crisis.