MNI INTERVIEW:EU State Aid Deal Possible In Q1-German Official

The European Union could agree on a relaxation of state aid rules to fund investment in response to U.S. green subsidies by as early as March, but Germany would insist that this would only be temporary and targeted and would oppose fresh joint borrowing, a senior German official told MNI.

State Secretary in the Federal Ministry of Finance Florian Toncar said Europe should not overplay its response to USD379 billion U.S. plans to drive investment in Washington’s Inflation Reduction Act.

“My advice to Europe is not to exaggerate the effect of those subsidies and take it as a reason to further escalate any trade conflict with the United States. We need to jointly resolve the issue,” Toncar said in an interview in Berlin. “I would also hope that in America there will be some rethinking over whether one can indeed reduce some of the protectionist content and provisions in the IRA.”

Europe’s own response could be agreed by as soon as the end of the first quarter, he said.

“Probably, we will see some flexibility in the application of European state aid rules. But it will be important to limit that flexibility in terms of quantity, in terms of business areas and also in terms of time,” he said. “Sound limits and no permanent suspension of state aid rules will be crucial to find a quick agreement.”

NEW JOINT DEBT TOO EXPENSIVE

Changes to aid should favour the private sector, said Toncar, a member of the liberal FDP in Germany’s governing coalition, while any public investment should come from existing European funds and instruments. New, public debt-financed instruments would be more expensive due to rising interest rates, he said. (See MNI: EU Green Deal Seen Tapping Existing Funds, Leveraged)

Germany approved in October a EUR200 billion package to protect households and businesses from soaring energy prices, but Finance Minister Christian Linder said earlier this month that it may not be necessary to use all the funds allocated.

Toncar said it was still impossible to calculate how much might be saved, but noted that the package had taken a conservative approach to estimating energy prices.

“Since then the prices have been sinking quite massively, so that indicates that there's reason to hope and to believe that we don't need the full 200 billion package.”

But, he added: “Contracts are adapted or changed over the course of the year. So we will have to observe and take care that the electricity and gas suppliers pass on any sinking import prices as best as possible to the end customer.”

Toncar was positive about Germany’s economic prospects for 2023, though recovery will be “very, very slow”, requiring continuing government support for activity. Gas reserves are likely be at 100% next winter, and six new LNG terminals are due to come online.

But German inflation, which peaked at 10.4 % in October before closing 2022 at 8.6%, is unlikely to reach the European Central Bank’s target rate of 2% before 2024.

“Our fiscal path, although flexible and proportionate to the degree of the crisis we are facing, must be clearly directed toward normalisation, and that will also relieve inflationary pressures,” he said.

"CHALLENGING YEAR"

European countries need to continue to boost competitiveness, including by reforming tax systems, he said.

“It gives the central bank greater credibility in saying we are really indeed focusing on price stability, and the member states are dealing with the competitiveness issues.”

While Germany will boost defence spending to an average 2% of GDP over five years, the ratio is unlikely to exceed 1.5% this year, and the finance ministry will keep a close eye on procurement procedures to ensure higher expenditure is allocated efficiently, he said.

Toncar admitted that 2022 was a “challenging” year for the new “Traffic Light” coalition government, with relations between Chancellor Olof Scholz’s SPD, the Greens and the FDP strained at times.

“Now the challenge will be to return from the more reactive crisis modes of governing to a more proactive, modus,” he said, citing “weaknesses in the German economy even before the war, and which have now to be addressed. Not with the same sort of time pressure as we had to act last year, but with the necessity to come to solutions in the course of 2023.”