Estonian Prime Minister Kallas uses Berlin trip to warn against ‘dependence’ on state aid

Speaking in Berlin on Tuesday (19 March), Estonian Prime Minister Kaja Kallas warned against increasing reliance on state subsidies, as it posed the risk of taxpayers having to underwrite company losses, while profits were kept private.

During the Covid pandemic, and the energy crisis following the Russian attack on Ukraine, European governments spent billions of Euros, to keep companies afloat and help households struggling with higher bills.

In Kallas’s view, however, European governments may have gone too far, thereby creating the expectation, among companies, that every loss would be mitigated through state support.

“We have understandably shifted to crisis mode,” said the ALDE/Renew leader at a conference celebrating the 80th anniversary of the publication of the classic seminal economic book, ‘The Road to Serfdom’, by the liberal philosopher and economist Friedrich August von Hayek.

She pointed out that the growth in government subsidies had led to a suspension of fiscal rules and a poorly controlled increase in state aid, during a prolonged period of very low interest rates.

“An unfortunate side effect has been a growing culture of dependence […], the expectation that losses can be nationalised whereas profits remain privatised, [has] gradually gained ground,” said Kallas.

Businesses would simultaneously lobby for subsidies while objecting to tax increases, she pointed out.

“In an age of cheap money, sound public finances are increasingly viewed as an outdated dogma from a bygone era,” said Kallas.

Her warnings come amidst a debate on the future of the EU’s rules for national subsidies, or state aid, in which large EU countries like France and Germany would like to see some of the temporary relaxations in rules, introduced during the crisis, to remain.

As European – and particularly German – competitiveness has suffered, compared to global competitors, some business leaders and politicians, such as German Economy Minister Robert Habeck, argue that more debt-financed subsidies would be needed to keep industrial production in the country.

However, a group of smaller member states including Estonia, have recently circulated a letter calling for a return to strict EU state aid rules. They argued that it should instead use other measures to improve competitiveness, such as faster permitting procedures and investments into skills.

Smaller EU countries revolt against state aid spree

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“The problem with state aid is […] that even the rich countries will run out of taxpayer’s money,” said Kallas, warning against “competing on the basis of who subsidises more and more”.

She added, “Then European taxpayer’s money has run out, and we still haven’t dealt with the problems that we have today, which is innovation, and more support to R&D [research & development], to have this competitive advantage without the state subsidies.”

Speaking after Kallas at the conference organised by the Hayek Foundation, German Chancellor Olaf Scholz backed Kallas saying he “couldn’t agree more,” on not creating permanent dependencies on subsidies. He added that sectors like renewable energies, which currently benefit from broad government support, should be able to work without them, in the future.

With the creation of the EU Recovery and Resilience Facility (RRF) and the aid granted in response to high energy prices, Europe has undergone an “incredible fiscal expansion,”  said Scholz.

“But […] we have to get away from it. That is my firm conviction,” he said, adding that a phase-out of subsidies would naturally lead to some “jolting”.

Nevertheless, Scholz defended the use of state money to help companies during the Covid pandemic, arguing that the bailout of German flagship airline Lufthansa had even brought a positive return to the German state budget, as the government bought shares, that it later sold at a profit.

[Edited by Anna Brunetti/Rajnish Singh]

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