Terrorist threat will force countries to tear up EU budget laws

Pierre Gramegna says “challenging and long lasting” impact of the terrorist and refugee crises means countries have “no choice” but to ramp up spending

Terrorist attacks are the biggest threat facing the European Union and countries have “no choice” but to tear up budget rules and ramp-up spending in order to stop future atrocities, according to Luxembourg’s finance minister.

Pierre Gramegna said the “challenging and long lasting” impact of the terrorist and refugee crises, which have intensified during Luxembourg’s current presidency of the EU Council, were unlikely to be resolved for years.

Mr Gramegna said this created “exceptional circumstances” that meant governments had to prioritise security over fiscal discipline and the so-called Stability and Growth Pact that limits budget deficits to 3pc of gross domestic product (GDP).

“It’s obvious that what happened in the last couple of months was unforeseen to a very large extent,” he said in an interview with the Telegraph.

“Receiving refugees that are fleeing from war – you cannot put out a sign and say ‘I have a Stability and Growth Pact’ – so it is obvious that these are exceptional circumstances and exceptional expenses that are unforeseen and still difficult to forecast because you don’t know how long the refugees will stay and how long the situation will last.”

Francois Hollande, the French president, described the co-ordinated terrorist attacks in Paris last month that killed 130 people as an “act of war”.

Mr Hollande took the unprecedented step of invoking a solidarity clause in the EU treaty that requires countries to do all they can to help when a member is the “victim of armed aggression”.

“The security pact takes precedence over the stability pact. France is at war,” he told the French parliament.

Mr Gramegna agreed. “Military language inside the treaty has been triggered for the first time. We’re in very exceptional circumstances and that’s why reducing the discussion to meeting targets is just comparing apples and pears.”

France has already announced it will step-up defence spending by creating 8,500 additional police jobs and scrapping planned cuts to the armed forces.

The government estimates this will add around 0.1 percentage points – or €2bn in today’s money – to its budget deficit.

While France is already being monitored by Brussels for continually flouting deficit rules the European Commission has indicated that it will “show full understanding” if countries loosen their purse strings to reinforce security.

The EC has also mobilised EU funding to help countries deal with the massive influx of people, while it will also consider requests to exclude costs linked to the migrant crisis from budget deficit targets on a case by case basis.

However, Mr Gramegna said budget targets had to be met in the “medium term” in order to promote stability across the EU.

He denied that relaxing the rules would encourage less discipline across the bloc. “I have not heard one single country say: we’re not meeting our targets because of the refugee crisis or terrorist attacks”.

Mr Gramegna also hit back at the EC’s ruling that a so-called “sweetheart deal” between Fiat Chrysler and Luxembourg’s tax authorities violated European state aid rules.

The ruling will force authorities to claw back between €20m and €30m from the carmaker, but Mr Gramegna accused Brussels of “innovating” its interpretation of the law.

“We question if it is possible for the Commission to innovate in the interpretation of transfer pricing, once there is multiple interpretation of transfer prices this is not good for predictability of the rules and predictability that companies need,” he said.

Luxembourg said last week that it would appeal against the judgment of its transfer pricing arrangement, which critics say is used to reduce tax liabilities in relatively high-tax countries.

Mr Gramegna said clear laws were crucial if they were to be enforced. “What’s at stake here is the whole construction of the international fiscal system as we know it,” he said.

Mr Gramegna said an international crackdown on tax havens announced by the G20 last month would not put countries like Luxembourg, which has earned a reputation as a tax haven, at a disadvantage.

“We’re going to have a level playing field and when you have that, what really counts is all the other aspects of your economy. And with our knowhow and the skills we attract in Luxembourg, we have lots of assets that will make us prosper in the future – so I’m not worried.”