Fiscal policies across the EU reflect diverging economic strategies

Europe has seen different fiscal challenges across its governments. While Germany faces restrictive debt policies, Ireland struggles with a cash surplus and France prepares to raise taxes on the wealthy and corporations. Each country’s approach to its unique economic situation illustrates the diverse fiscal landscape within the EU.

Ireland is in the rare position of having an excess of funds, largely thanks to tax policies that attracted multinational companies, specifically from the U.S. Modified gross national income, which adjusts for Ireland’s high multinational presence, is expected to grow by 4.9% this year, with unemployment at 4.3%. In 2023, the nation was able to enjoy a budget surplus of 7.5% of national income and expects a 2.9% surplus in 2025, even with increased spending and tax cuts. Ireland’s competitive 12.5% corporate tax rate was a significant driver of this surplus, which attracted major corporations to its shores.

However, Ireland recently raised this rate to 15% for large companies to align with global tax reforms. Corporate tax receipts have surged from €7 billion in 2015 to €24 billion last year and are projected to hit €30 billion by the late 2020s. Recognizing the potential volatility of a tax base heavily dependent on a few large firms, Ireland plans to create a sovereign wealth fund with the surplus, much like Norway’s handling of oil revenues. Despite this sound planning, Ireland’s booming economy has left little slack, creating inflationary risks if the government spends too freely. Facing an election next year, Ireland’s budget included €250 energy credits, boosted child benefits, and raised income-tax thresholds.

Germany’s story is a stark contrast to Ireland’s surplus. The country’s self-imposed debt brake restricts the government’s ability to borrow, even in times of crisis. This has led to heighted tensions within Chancellor Olaf Scholz’s coalition government, comprised of the Social Democratic Party, the Greens, and the Free Democratic Party. Each party has differing priorities, and the debt break has fueled debate over addressing the country’s sluggish economy. Finance Minister Christian Lindner recently proposed a reform paper detailing solutions for economic revival, but it conflicts with the core policies of the SPD and the Greens. This escalating tension may lead to the FDP’s departure from the coalition, potentially resulting in a minority government or even snap elections. This further complicates matters; the budget for 2025 is in limbo, with unresolved funding issues due to last year’s court ruling barring the reallocation of COVID-19 emergency funds. The government could collapse if the coalition cannot agree on a path forward.

France, facing one of the highest deficits in Europe, is shifting away from the pro-business tax cuts. The new prime minister, Michel Barnier, has announced plans to reverse some of Macron’s tax cuts, including possible increases on the wealthy and corporations, to address the widening budget deficit. France’s debt-to-GDP ratio has ballooned to over 110%, the highest in the EU after Greece and Italy. Macron’s earlier tax cuts were designed to stimulate economic growth by encouraging investment and reducing corporate burdens. They included lowering corporate taxes from 33% to 25% and implementing a 30% flat tax on investment income. However, many critics believe the policies disproportionately benefited the wealthy, widened inequality, and drained the national budget. Now, facing a €3 trillion debt, Barnier plans to raise €110 billion over the next few years. Proposed tax measures may include increasing the flat tax to 35% and introducing a temporary tax on “superprofits” from major corporations. France faces a balancing act, as Barnier keeps investor confidence in mind; foreign investors are wary of France’s high debt levels, and any new policies risk unsettling them further.

The varying approaches to fiscal policy across Ireland, Germany, and France reveal the complexities of managing national economies within the EU. These fiscal strategies will shape each country’s economic landscape and the overall stability and cohesion of the EU in the coming years.