Small and medium-sized enterprises (SMEs) in Germany do not complain. They work. They adapt to external circumstances and are successful with their products against all odds. Many of them worldwide. This is the secret of their success. But the current economic situation gives cause for concern. We launched our DATEV SME Index a year ago. Our index provides up-to-date, fact-based and broad insights into German SMEs in a way that has not been available before: it is based on the advance VAT returns of more than one million SMEs and the payroll accounts of more than eight million employees. As an IT service provider for the tax consulting profession, this effectively lets us look directly into the engine room of German SMEs. But this detailed view is not very pleasant at the moment. The figures we publish each month based on data from tax advisors paint an almost worrying picture. The increase in the minimum wage that has already been decided is likely to exacerbate this situation for small and micro-enterprises. Sales are falling, wages are rising The German economy is in a difficult situation. Since September 2024, we have observed declining sales in SMEs. Concurrently, wages are increasing. Our latest statistics show that this trend is continuing — in all German federal states, industries and company sizes. There is currently no indication of a change in this trend. As previously described, SMEs rarely voice dissatisfaction. Instead, they seek pragmatic solutions. This challenging situation is no different. There are in fact a number of ways to resolve this issue. Many SMEs are looking to the federal government with high expectations. They expect it to pursue business-friendly policies to strengthen the backbone of the German economy. Small and medium-sized companies represent 99 percent of it and employ around half of the workforce in Germany. Without relief and incentives, the existence of many SMEs is increasingly at risk. Above all, we need to reduce bureaucracy and implement a bureaucracy moratorium: meaning the standardization and reduction of documentation and retention requirements. > Above all, we need to reduce bureaucracy and implement a bureaucracy > moratorium: meaning the standardization and reduction of documentation and > retention requirements. Financial incentives for greater productivity The regulatory frenzy of recent decades in Germany and in the EU makes it difficult for companies to catch their breath. It not only costs SMEs time and money, but it also hinders innovation. But there are now initial indications that something is being done about this. The importance and necessity to modernize the administration has been recognized and will be supported financially. A separate ministry for digital transformation and state modernization is a positive first step. > The German government has also already decided on the so-called investment > booster. However, this will only help to a limited extent The German government has also already decided on the so-called investment booster. However, this will only help to a limited extent. The investment booster allows for declining balance depreciation of up to 30 percent, which enables companies to write off higher amounts, especially in the first few years. This is intended to accelerate investment and secure liquidity for businesses. However, this only helps if there is still enough substance or capital available for further financing. And in many cases, this is no longer the case for SMEs. In order to boost productivity, financial incentives must be provided as quickly as possible. It is our hope that there will be extensive investments in infrastructure and the digitalization of administration as well. Artificial intelligence creates greater efficiency Another encouraging sign: new technological advancements facilitate operations for business. Artificial intelligence (AI) is more than just a buzzword. As Germany’s second largest software company, we are dedicated to developing innovative products and solutions for tax firms, so that they can provide even more exceptional counsel to their clients — mostly small and medium-sized businesses. For me, it is evident that AI will positively transform work in tax consulting firms, creating significant opportunities. AI helps to simplify monotonous, repetitive tasks, allowing for more efficient workflow. It is a valuable tool for supporting individuals rather than replacing them. This is especially important in a time of pressing issues such as skilled worker shortages. The use of AI thus also offers new opportunities for all companies that wish to prioritize their core business over bureaucracy. Digital and AI-supported processes with tax advisors will provide sustainable support in this. The acceptance and use of AI tools is steadily increasing in tax consulting firms. Among the most widely used industry-specific offerings, the DATEV appeal generator and specialist research tools are highly regarded. It is clear that we have only just begun to see the full extent of the situation. We are working every day on new solutions that make it easier for tax consulting firms to better advise their client companies to improve their successes. We also use our detailed knowledge that we generate from our DATEV SME Index. > The smart use of AI can also enhance the success of German SMEs and strengthen > their ability to compete globally — despite existing regulatory challenges, > bureaucratic hurdles and complicated tax systems. Ultimately, it depends on how we deal with the challenges in our daily work. How we successfully shape the path to the digital future with the possibilities offered by AI. We have learned from major American software providers over the past 20 years that those who best understand the data business enjoy great economic success. Now comes the second chance. The smart use of AI can also enhance the success of German SMEs and strengthen their ability to compete globally — despite existing regulatory challenges, bureaucratic hurdles and complicated tax systems. So, enough whining. Let’s proceed! Robert Mayr, tax advisor, auditor and doctor of business administration, is CEO of DATEV eG since 2016. From 2014 to 2016, he was on the board of the Nuremberg-based data processing cooperative, responsible for finance and purchasing, and had already been responsible for internal data processing and production since 2011. After studying business administration at Ludwig Maximilian University in Munich, he began his professional career as a consultant at Treuhandanstalt Berlin. Mayr worked for Deloitte from 1994 to 2001, after which he spent nine years as managing partner of Solidaris Revisions-GmbH in Munich. Since 2012, Mayr has been vice president of the Nuremberg Chamber of Tax Consultants. DATEV eG is a data processing cooperative with more than 850,000 customers. Founded in 1966, it now employs a staff of about 9,000, working at its headquarters in Nuremberg and 22 branch offices throughout Germany. Its legal structure as a cooperative guarantees continuity, meaning no investor can buy DATEV. For more information on the DATEV Small and Medium-Sized Enterprises Index, please visit mittelstandsindex.datev.de (in German).

LONDON — British Prime Minister Keir Starmer stood by his chief finance minister after she admitted breaking housing rules when renting out her family home. Chancellor Rachel Reeves issued an apology late Wednesday night after an investigation by the Daily Mail newspaper found she’d failed to obtain a rental license when putting her home on the market after moving into Number 11 Downing Street with her family. The opposition Conservatives are calling for Reeves to quit, but Starmer said Wednesday that while “it is regrettable that the appropriate licence was not sought sooner,” he was “satisfied that this matter can be drawn to a close following your apology.” The timing of the row is particularly awkward for the prime minister, who recently lost his deputy Angela Rayner over a housing tax scandal. His government is also about to preside over a tricky budget that could see it junk a key economic pledge not to raise income tax, national insurance or VAT. In the exchange of letters, sent to the media just after 11 p.m. Wednesday, Reeves said there were “selective licensing requirements” in the Dulwich Wood ward of Southwark council where her home was located. “Regrettably, we were not aware that a licence was necessary, and so we did not obtain the licence before letting the property out.” The chancellor added: “This was an inadvertent mistake. As soon as it was brought to my attention, we took immediate action and applied for the licence.” Reeves said she had contacted the U.K.’s ethics watchdogs — Independent Adviser on Ministerial Standards Laurie Magnus and Parliamentary Commissioner for Standards Daniel Greenberg — to probe the matter. Writing back, Starmer said Magnus believed “further investigation is not necessary” as the Ministerial Code — which governs behavior of government reps in the U.K. — says “an apology is a sufficient resolution” in certain circumstances. But the opposition Tories, already seeking to pressure Reeves as the budget looms, leapt on the row. Conservative Leader Kemi Badenoch said the PM “must launch a full investigation” and “show he has the backbone to act” if Reeves broke the law. Shadow Chancellor Mel Stride doubled down Thursday morning, telling Sky News it wasn’t “good enough simply to try and brush it under the carpet” and saying Starmer needed to “accept that her position is not tenable.”

ATHENS — European prosecutors announced Monday charges against six people for their alleged involvement in criminal networks that flood the EU with fraudulently imported Chinese goods. The European Public Prosecutor’s Office (EPPO) seized 2,435 shipping containers at the Port of Piraeus, Greece’s largest, which is majority-owned by Chinese state-owned enterprise COSCO. The containers were primarily filled with e-bikes, textiles and footwear. It was the largest seizure of containers in the EU in history. The scheme to circumvent the payment of anti-dumping duties applicable to imports from China had been ongoing for at least eight years, resulting in an estimated loss of €350 million in customs duties and a further €450 million in VAT, depriving both national and EU budgets, according to the EPPO. Two customs officers have been charged by European prosecutors in Athens with repeated false certification, causing unlawful gains and damaging the EU budget by abetting customs fraud. Four customs brokers have been charged with repeated customs fraud and inciting false certification. The EPPO-led investigation, named “Calypso,” targeted criminal networks managing the entire circuit of goods imported from China into the EU, including distribution across member countries while evading customs duties and committing large-scale VAT fraud. The investigation involved textiles, shoes, e-scooters, e-bikes and other goods imported from China. The proceeds were laundered and sent back to China. “These highly organized criminal networks have specialized in this kind of fraud for years,” said European Chief Prosecutor Laura Codruța Kövesi in a statement. “Operation Calypso sends these criminals a clear message: the rules have changed and there are no more safe havens. Now, we must transform this spectacular success into systematic work. We require dedicated and specialized police, customs, and tax investigators throughout the entire EPPO zone,” Kövesi added. These networks — mainly controlled by Chinese nationals, according to EPPO — are also involved in money-laundering and sending the profits back to China. The seized containers are currently being inspected. So far, Greek authorities have only opened a limited number — but the contents of the containers are estimated to be worth €250 million. EPPO said that opening and analyzing the goods represents an unprecedented workload for Piraeus customs officials, as well as a safety risk. At least 500 of the containers are filled with e-bikes. Of those, 360 had not yet been declared to customs. However, based on the known modus operandi of the criminal organizations, prosecutors assume they would have been mis-declared and undervalued in order to get around anti-dumping duties applicable to Chinese imports. On average, based on the early stages of the investigation, only 10-15 percent of the e-bikes in a container were declared. Conservatively, the damage to the EU budget from these e-bikes alone is estimated at €25 million in unpaid customs duties and €12.5 million in VAT losses.

LONDON — The man who wrote Labour’s election-winning manifesto said he stands by the party’s cast-iron commitment not to raise income tax, VAT or national insurance. Ravinder Atwhal, who left his role as Keir Starmer’s special economic adviser in July, argued Chancellor Rachel Reeves would not choose to raise these taxes in the upcoming autumn budget even if she were not bound by the host of strict pre-election pledges. In an interview with POLITICO’s Westminster Insider podcast, the former Labour adviser insisted he does not regret committing to what’s become known as the “tax lock.” “I’m not sure had the lock not been made, people [the Treasury] would have then looked to raise one of those taxes,” he said. The lock has faced a political backlash from some Labour MPs over concern it has needlessly restricted the government’s ability to invest in public services given the eventual scale of the party’s 2024 landslide win.  Reeves is under pressure to find ways to raise revenue ahead of the autumn budget. She is bound by one of her own fiscal rules of not borrowing in order to fund day-to-day spending — leaving tax rises or spending cuts as alternatives. Athwal acknowledged that it is likely Reeves will have to raise taxes elsewhere: “There are other options out there.” He said he was confident that “the public would understand” such a move given the worsening global economic environment, in part due to tariffs introduced by U.S. President Donald Trump. ‘DIFFICULT TRADEOFFS’ Following the government’s humiliating U-turns on welfare payments and the winter fuel allowance earlier this year, Labour’s former policy director rejected the suggestion of a disconnect between the Downing Street policy operation and the wider Labour party. “I think it comes more from a not wanting to shy away from difficult tradeoffs, difficult problems, and really wanting to crack on and do things quickly,” he said. “I think that’s where it’s maybe gone wrong”. Asked about whether he feels the government needs to reset its policy prospectus, given its declining poll numbers, Athwal was defiant. “A lot of things that have happened over the last year which don’t necessarily get shiny headlines and I’m not sure I’d expect the average member of the public to have noticed them,” he said. But he added: “They will make a difference as long as the government remains focused on the delivery of them.” Ravinder Atwhal argued Chancellor Rachel Reeves would not choose to raise these taxes in the upcoming autumn budget even if she were not bound by the host of strict pre-election pledges. | Tolga Akmen/EPA Athwal described a feverish effort in government to make good on growth-boosting infrastructure projects. “I see Rachel Reeves sit there with her table of projects that she has announced and really honing in on asking, is this thing being delivered? And I think Keir is exactly the same way.” But Atwhal acknowledged that time is of the essence – especially given the growing popularity of Nigel Farage and Reform UK, which continues to lead in U.K. polls. He reflected: “The thing that is fueling the popularity of Farage is the sense that the country is not working.” Labour, he said, needs to deliver quickly. “The electorate isn’t attached to the Labour Party in the way that I am … they’ll deliver their judgment.”

BRUSSELS — The European Commission has backed drastic measures announced by the new Romanian government to bring down its borrowing and avoid a blow-up with Brussels. Newly-elected Romanian President Nicușor Dan is pushing a raft of measures including a public-sector pay freeze, an end to energy price caps, and a bumper VAT hike to bring down a deficit that in 2024 hit 9.3 percent of GDP, the widest in the EU. The overspending led the EU executive last year to begin an Excessive Deficit Procedure against Romania, putting it on its list of countries under strict orders to curb their borrowing or else face sanctions. The Council’s approval on Tuesday removes for now the threat of Romania losing financial support from the EU. Following a meeting of EU finance and economy ministers, European Commissioner Valdis Dombrovskis said Bucharest’s measures represented an “important and positive step toward complying with the new excessive deficit recommendation, provided all measures are swiftly legislated and implemented.” The Commission will produce a follow-up assessment by autumn, he added. In a speech given to parliament earlier this week Dan said he wanted to stop Romania’s debt falling to “junk” status, which would make the country essentially uninvestable. The move also marks a shift in the EU’s attitude to Romania after the country came close to electing anti-establishment candidate George Simion in its national election earlier this year. Dan’s proposed package of spending cuts and tax hikes is already proving unpopular, triggering street protests and prompting Simion to call for a no-confidence vote. The last meeting saw European ministers blast the previous Romanian administration for not taking “effective action” to fix the country’s finances. Elsewhere on Tuesday, Romania’s central bank said it expected the package of fiscal measures to push inflation up in the short term but would address some of its underlying causes. In doing so, it said the package would bring down Romania’s financing costs and support the leu’s exchange rate. The Bank had spent an estimated €6 billion in May — nearly 10 percent of its total foreign reserves — in calming what ultimately proved to be a brief crisis of confidence in the local currency.

BRUSSELS — Romania’s fledgling government is made up of the country’s most pro-European politicians, but that hasn’t stopped them citing Brussels as a key reason why they need to impose a drastic set of tax hikes and spending cuts to avert financial collapse. For the past five years, Romania has been spending way beyond its means — in the words of new President Nicușor Dan, eating a large pizza while only paying for a medium-sized one — and has a projected budget deficit of around 9 percent of economic output this year, the highest in the European Union.  That record of poor fiscal management has provoked repeated reprimands from the European Commission, which Prime Minister Ilie Bolojan now says can no longer be ignored. This week, ministers from EU countries will vote to decide on a strict plan setting out exactly what Romania must now do to restore order to its public finances.  Even before Tuesday’s vote in a meeting of EU economy and finance ministers, Romania’s new prime minister is pushing through a dramatic package of austerity measures that will deal a blow to economic growth, as well as hammer the government’s popularity.  But without action now, Bolojan argues, the country will face the wrath of the Commission and — worse than that — the prospect of a downgrade from credit rating agencies, potentially reducing Romanian government debt to “junk” status. That would risk a spiraling financial meltdown, and the prime minister has warned of the risk to salaries and pensions if the country’s creditors lose faith.  “Access to European funds is conditional on fiscal reform; without it, we would lose access to these funds,” Bolojan told reporters last week. “Think about what it would mean if we could not continue half of the investments currently underway, in major highways, rail lines, and projects in every locality across Romania. This would place us at risk of being downgraded again into so-called junk status, making our country unattractive to investors.” He added: “We cannot let our country end up in a situation like Greece.” Speaking in an interview with the Antena 3 CNN channel, Bolojan said Romania’s previous approach of promising its creditors and the EU that it will reduce its deficit, only to keep spending more than it can afford, resembled the fable of the boy who cried wolf. “Given that you often announce that it will happen and it doesn’t happen, when that thing really happens, no one believes you that it will happen and no one helps you anymore,” he said.  ‘AUTUMN OF DISCONTENT’ The fiscal crisis is a huge test for the new administration of Dan, the centrist former mayor of Bucharest, who was elected president in May. He saw off a challenge from far-right populist George Simion to win the presidency, promising to clean up corruption, keep Romania on its pro-Western path supporting Ukraine, and to tackle the country’s ballooning debts.  Dan said before he was elected that he was opposed to raising VAT, but Bolojan’s package of reforms envisages large increases in these taxes, including on food, alongside other painful measures such as capping public sector pensions and salaries, requiring teachers to work longer hours, increasing excise duties on fuel, alcohol and tobacco, and taxing gambling winnings and bank profits.  The first tranche of these reforms is due to come into force in August, with the second phase starting Jan. 1 next year. Bolojan must pass his reforms through Romania’s parliament, though most observers believe the four-party coalition will remain united and that this legislative step will not prove to be a major hurdle for the prime minister.  The public reaction is another matter. “We will see the PM and the parties of government fall in the polls,” said Radu Magdin, a former Romanian government adviser who is now CEO of Smartlink Communications. While riots are “less likely,” public protests may follow the next fiscal packages, he said. “The advantage the government has is that it’s summertime. The disadvantage is the autumn of discontent coming in September, after the holidays.” Romania’s new prime minister is pushing through a dramatic package of austerity measures that will deal a blow to economic growth. | Robert Ghement/EFE via EPA On Tuesday, the EU’s finance ministers will set the parameters for what Brussels wants to see from Bucharest’s reform plans, though it’s not likely that they will have had a chance to take account of Bolojan’s latest austerity blueprint. Romania will then have until Oct. 15 to produce a budget that meets the EU’s requirements for reducing its deficit.  According to Daniel Dăianu, chair of the Romanian Fiscal Council, which advises the government on spending, the country must bring the deficit down to below 6.5 percent of gross domestic product by 2026.  “Expenditures cuts and tax increases will affect GDP growth, but they are unavoidable,”  Dăianu said in a recent presentation. 

LONDON — Who’d want to be Rachel Reeves right now? While Britain’s top finance minister has the full-throated support of her boss, Prime Minister Keir Starmer, it’s been a deeply bruising week for the country’s first female chancellor. A humiliating government climb-down on a money-saving welfare reform plan was followed by market-moving tears from Reeves in the House of Commons on what she has stressed is a personal matter. With unfortunate timing, the scene — mocked by opposition politicians — came just as Starmer failed to explicitly endorse Reeves staying in post. He has now very publicly backed her — but the fundamental economic challenges Reeves faces aren’t going anywhere. Reeves’ self-imposed fiscal rules restrict government borrowing. But, after the latest costly welfare climb-down, the keen chess player’s next move could involve tax hikes toxic to swing voters, spending cuts disliked by her Labour colleagues — or both. POLITICO courted the views of six wise heads who have been in the political trenches in the U.K. and further afield to gauge where Reeves might turn next. DON’T APPEASE — JARED BERNSTEIN, FORMER CHAIR OF JOE BIDEN’S COUNCIL OF ECONOMIC ADVISERS AND AN ARCHITECT OF ‘BIDENOMICS‘ Jared Bernstein — who saw Joe Biden lose to Donald Trump despite touting improvements in the economy — urged Reeves not to get too freaked out about public opinion. “If voters are perennially unhappy, they’ll always throw out the incumbents no matter what they do,” he said. “If you try too hard to appease … a deeply unhappy electorate, you won’t have time for anything else.” Reeves’ head is “in the right place” and she should keep her focus and do what she thinks is right, he added. Acknowledging the U.K. economic data is “quite tough” with an “uncomfortably low growth rate bumping up against uncomfortably high interest rates,” Bernstein argued the math is “pretty straightforward.”  “You have to cut spending, raise taxes, or some combination of both,” he said. On the tax-raising front, without breaking manifesto pledges, Bernstein thought there were options “including freezing [income] tax thresholds … for a couple of more years through to 2030.”  “I’ve seen ideas to raise the private health insurance premium tax, some pension tax reform,” he added. “I think there’s a proposal to reduce the revenue level at which businesses pay VAT. And that has potential … [to] be quite revenue-positive.” Chair of the US Council of Economic Advisers Jared Bernstein. | Samuel Corum/EFE via EPA He added: “One has to be mindful of raising the tax burden when growth is already underperforming. But I think some of the suggestions that I just walked through seem pretty marginal to me, so perhaps there’s some action there.” MANIFESTO PROMISES COULD GO — RUTH CURTICE, CHIEF EXECUTIVE OF THE RESOLUTION FOUNDATION Ruth Curtice, the Treasury’s former director of fiscal policy and now boss of a key living standards think tank, said Reeves should consider raising taxes and cutting Whitehall spending — including 2028-29 totals that were set at her spending review just weeks ago. But Reeves should not, Curtice cautioned, touch her fiscal rules. This is especially true because Reeves’ next budget will have less wriggle room. She’ll be working within a four-year timeline and not a five-year one, thanks to Reeves’ changes to fiscal rules. The Resolution Foundation has previously branded the freezing of income tax thresholds a “stealth tax,” but Curtice said Reeves should consider more freezes — and even manifesto-breaching rises in income tax, national insurance or VAT. “She shouldn’t rule out personal taxes, given the sums of money she needs to raise and the economic challenges of raising further business taxation,” said Curtice. “One option is freezing personal tax thresholds, but she might need to be bolder and explicitly break manifesto commitments if she needs big sums of money.” Curtice reckoned Reeves needs to show her general direction of travel much sooner than the fall to avoid a summer of speculation. “Some laying the ground on tax could be helpful … Speculation all the way from now until autumn could be unhelpful economically,” she added. USE BANK OF ENGLAND RESERVES — JAMES MEADWAY, FORMER ECONOMIC ADVISER TO SHADOW CHANCELLOR JOHN MCDONNELL James Meadway — who was once a policy adviser at the Treasury, went on to advise left-winger John McDonnell, and now hosts a podcast called “Macrodose” — suggested Reeves could save billions of pounds a year by moving to a system of “tiered reserves.” “The Treasury indemnifies the losses that the Bank of England somewhat notionally makes on quantitative easing,” he said. “If you introduced a system of not paying so much interest on the reserves that the commercial banks hold at the Bank of England, you could save several billion pounds a year on this.” Meadway acknowledged “the City [of London, Britain’s financial powerhouse] wouldn’t like it” — but reckoned it would be “a lot easier than making more cuts, or raising whacking great taxes elsewhere.” “It would free up billions for the Treasury to spend to get you through what is otherwise going to be an extremely tight budget,” he said, and “keep within the fiscal rules. “The problem that Rachel Reeves really sharply faces … is that you have pinned everything on the fiscal rules,” he argued. “If you say we are now going to change them, that will provoke a reaction of the kind we have just seen through bond markets.” DON’T SURPRISE THE MARKETS — RUPERT HARRISON, FORMER ADVISER TO GEORGE OSBORNE Rupert Harrison — a key Tory ex-aide who is now a senior adviser at investment management company PIMCO — agreed markets would be spooked by any watering down of Reeves’ fiscal rules, with investors already factoring in tax rises.  “The gilt market has already started to react negatively to news about the welfare bill, with yields rising relative to other countries, but the scale of that reaction has been limited by a widespread assumption amongst investors that the government’s response will be to raise taxes in the autumn,” he said. “Any suggestions that the government might look again at watering down its fiscal rules would start to risk a more negative market reaction given the U.K.’s well-known fiscal vulnerabilities,” Harrison added. “Markets now assume that cuts to welfare spending and departmental budgets are effectively off the table — if they start to sense that the political will to raise taxes is also lacking then concerns about fiscal sustainability will grow.” Gavin Barwell, former chief of staff to Theresa May. | Vickie Flores/EFE via EPA GIVE MPS A REALITY CHECK — GAVIN BARWELL, FORMER CHIEF OF STAFF TO THERESA MAY Gavin Barwell, in the trenches as the Theresa May government faced huge disloyalty in the ranks over Brexit, thought Reeves needed to be better at forcing members of parliament to say what hard choices they would actually make. He drew parallels between the current government’s party management woes and the dilemma facing his former boss. “Different people kept putting to parliament different propositions of how to solve the Brexit question, and parliament just kept saying no, but it never had to say what its answer was,” he recalled. “You’ve got to do a better job of exposing to your backbenchers what the realm of possible options are. You can’t ultimately change the fiscal arithmetic. Does the government try and borrow some more money? It is quite difficult in the bond markets at the moment. “Does it tax more? If so, who does it tax? Does it cut spending? If you don’t want to cut spending from welfare, where do you want to cut spending?” He added: “You’ve got to find some way of confronting [MPs] with the reality of the situation, and having some collective decision-making about what are the least bad ways of trying to navigate out of that situation.”   ‘LABOUR MPS MUST DECIDE’ — LUKE SULLIVAN, STARMER’S FORMER POLITICAL DIRECTOR “Rachel Reeves’ position is significantly stronger than is often perceived,” Sullivan — an ex-aide to Starmer who is now a director at the consultancy Headland — pointed out. The prime minister’s “full-hearted support” and the “notable vote of confidence from the financial markets” to Starmer’s endorsement of her show “Reeves is not only secure in her position, but pivotal to the government’s economic credibility.” “While some policy adjustments, such as on welfare, may be understandable,” Sullivan said, he warned Labour MPs must not be under any illusion that the government’s ambitions need anything less than “rigorous fiscal discipline” met by “increased taxation, spending restraint, or other measures.” He added: “None of these choices will be politically easy, but they are necessary and Labour MPs must decide.”

Romania’s new government is bracing for a baptism of fire as its drastic measures to slash the highest budget deficit in the EU are likely to provoke a severe backlash. The potentially inflammatory ideas under consideration include slashing 20 percent of civil servant jobs — at least 167,000 people — ramping up value-added tax and creating a new tax on gambling. The deficit stood at 9.3 percent of gross domestic product in 2024, and failure to haul it down could see the country’s sovereign rating downgraded. That would increase borrowing costs and potentially further widen the deficit. Romania also risks the suspension of EU regional development and post-pandemic funds. A four-party coalition led by liberal Prime Minister Ilie Bolojan was just sworn in on June 23 — and the pushback has already begun. Civil servants working in the building that houses the prime minister’s office on Friday protested against draft legislation that would cut bonuses and the number of extra days off for those working in dangerous conditions, Digi24 reported. The government postponed a discussion on the topic amid calls for union talks. The European Commission asked Romania to reduce its deficit to 2.8 percent of GDP by 2030 in a draft recommendation to be discussed at a July 8 meeting of economy and finance ministers. Getting there will be painful. In addition to slashing the civil service, new taxes on gambling and increases in excise duties are expected, according to a draft government plan. The new government also plans to increase the tax on profits and dividends to 16 percent from 10 percent, and to raise the VAT rate on firewood and other energy products to 9 percent from 5 percent. Some other reduced VAT rates, excluding food and medicines, would increase to 19 percent. “This correction is so extensive, so far-reaching, that pain cannot be avoided,” said Daniel Dăianu, a former finance minister who presides over the Romanian Fiscal Council, which advises the government on budget issues. He added that the balancing would be “a day of reckoning” for Romania. The new government also plans to reevaluate investment projects, and to restrict government support programs to those that would increase exports, decrease imports and create added value. “We have to convince Romanians, international financiers and the Commission to come together in this effort to avoid a [sovereign rating] downgrade that would trigger a more complicated and more painful situation for Romania,” Finance Minister Alexandru Nazare told reporters. PAINFUL REFORM Ana Otilia Nuțu, a public policy analyst at the Bucharest-based Expert Forum think tank, said it was difficult for the government “to sell austerity when you see the same tired faces in government [that] people voted massively against.” President Nicușor Dan plans to discuss tax evasion as a threat to national security with Romania’s top national security officials at a meeting on Monday. | Robert Ghement/EPA The new government comprises three of the four parties that have overseen a rise in the budget deficit over the past few years: the center-left Social Democrats, the center-right Liberals and the UDMR Hungarian minority party. Siegfried Mureșan, a liberal member of the European Parliament, said Bolojan had demonstrated an ability to successfully manage budget cuts as mayor of the northwestern city of Oradea. “Ilie Bolojan has a true reformist track record,” Mureșan said. “He made the institutions he led more efficient, he reduced the number of civil servants.” Expert Forum’s Nuțu said austerity measures would be “terribly unpopular” if the government doesn’t reduce unnecessary public expenditures such as high pensions for former civil servants. “People will be very angry and we will continue to see, in the next elections, that they will blow everyone away,” she said, predicting a potential further rise in hard-right populism.  Nuțu and Dăianu pointed to efforts to collect more VAT as one area that could bring significant gains in reducing the deficit.  The gap between total potential VAT revenues and what the Romanian tax authorities collected in 2022 was €8.5 billion — or more than 30 percent of the total that could be collected, according to the latest Commission data. “There will be a forceful intervention in this area,” said Victor Negrescu, a Social Democrat member of the European Parliament.  Romania’s tax authority needs to digitize to target evasion, he said, adding many people run unregistered economic activities and don’t pay the taxes due. President Nicușor Dan plans to discuss tax evasion as a threat to national security with Romania’s top national security officials at a meeting on Monday. The Fiscal Council’s Dăianu said the new government still had to produce an impact assessment of most of the measures it is considering. But in a positive scenario, these could pull Romania’s budget deficit under 8 percent of GDP by the year’s end, he predicted. “The numbers are still approximate, but I believe Romania will avoid a downgrade,” Dăianu said.

Law enforcement agents in four countries carried out coordinated raids on Wednesday targeting fraudulent Chinese imports to the EU, the European Public Prosecutor’s Office announced Thursday. The EPPO-led investigation alleges that criminal networks defrauded the EU of an estimated €700 million through large-scale customs and VAT fraud involving textiles, shoes, e-scooters, e-bikes and other goods imported from China, the EPPO said in a statement. The proceeds were then laundered and sent back to China, it said. Authorities conducted 101 searches on Wednesday across Bulgaria, Greece, France and Spain, the EPPO said.  Ten suspects, including two customs officers, were arrested, and law enforcement seized €5.8 million in various currencies, 27 vehicles, luxury items, 11 properties, and thousands of shipping containers and e-vehicles, according to the EPPO. The goods in the scheme were mainly brought in through the Piraeus Port in Greece, investigators said. In 2019, the EU’s anti-fraud investigators found that customs officials at the Chinese-owned Piraeus failed to stop fraudulent imports.  The imports were substantially undervalued or misclassified to evade customs duties, and their destinations were falsified to avoid paying VAT in the country of entry. EPPO alleges the goods were then transported using false documents to France, Italy, Poland, Portugal and Spain, where they were sold on the black market.

SOFIA — Has Bulgaria slashed key state-controlled prices to massage down inflation numbers and help it qualify for euro membership? In April, the country announced (rather surreptitiously) a highly unexpected 82.8 percent cut in daily fees for hospital treatment. Even the presenters on state TV confessed the reasons behind the move were a mystery. So what is the Bulgarian government up to? Sofia is now on track to receive a green light next month to adopt the European single currency on Jan. 1, 2026, but only passed the inflation test by the skin of its teeth — and the plunging health costs played a vital role in that. Those reduced healthcare costs have shifted attention to Bulgaria’s control over prices set at the state level and how those impact consumer price indices. “The only reason Bulgaria has qualified is, if you look at the inflation data, due to state-administered prices,” a former Bulgarian government official familiar with the data told POLITICO. “It is well known that statistical data was adjusted to show results more favorable than reality — especially in sectors like postal services, transport and healthcare.” While healthcare is the big factor, rail fares were also cut by over 9 percent, and postage costs were reduced by nearly as much. In all, the reductions in state-set prices helped push the harmonized index of consumer prices [HICP] down by 1.2 percentage points in April compared with March, bringing Bulgaria within the required limits. Steve Hanke, a professor of applied economics at Johns Hopkins University and the economist who designed Bulgaria’s currency board in the late 1990s, said the data raised red flags. “I think there’s a high probability that [the inflation data] has been manipulated,” Hanke told POLITICO in emailed comments. “Given my experience as an advisor to the president of Bulgaria (1997–2002) and my observations of the machinations surrounding Bulgaria’s application to formally enter the eurozone, I would not trust inflation data that have been thrown up as far as I could throw them.” Any discussion of the data used to bind the former Soviet satellite more tightly to the heart of the EU quickly becomes politically charged. Pro-Kremlin, anti-EU politicians have long accused the administration of cooking the books to rush the country into the eurozone before it is ready, running the risk of importing western European prices. The European Commission notes the critical role of state-set prices in meeting the inflation target. | Vassil Donev/EFE via EPA Bulgaria’s government has said the sudden shift in the hospital prices was unrelated to euro convergence, but technocrats, economists and even — most importantly — the European Commission note the critical role of state-set prices in meeting the inflation target. MAKING THE GRADE To make the grade for single currency convergence, Bulgarian inflation was required to fall within 1.5 percentage points of the average of the three EU countries with the lowest inflation rates. Economists estimate that the drop in hospital prices alone subtracted 0.89 percentage points from the overall 12-month inflation rate, which came in at 2.7 percent, narrowly clearing the threshold for euro entry (it was in fact just below the reference value of 2.8 percent for the price stability criterion.) The European Commission openly acknowledges the importance of April’s reduction in the cost of a daily hospital stay from 5.8 leva (€2.97) to 1 lev, given its weight in the core index of prices. “The drop in April 2025 of the annual HICP inflation rate was largely due to a substantial reduction in hospital fees,” the European Commission said in its convergence report on Bulgaria. “In April, hospital fees were reduced from 5.8 BGN to 1 BGN, that led to 2.9 percentage points decline in annual services inflation.” Bulgaria has long been seen as a strong contender for euro membership due to its tight budgets and the fact its currency is pegged to the euro under the strong management of a currency board established in 1997. Inflation, however, has recently been a bugbear. “The pick-up in inflation in Bulgaria in 2025 is of a temporary nature and mainly reflects increases in January 2025 in a mix of taxes and administered prices, partially offset by the lowered hospital fees in April,” the European Commission added. Overall, Bulgaria’s official announcement of HICP inflation for April 2025 put the average rate for May 2024 to April 2025 at 2.7 percent compared with the same period 12 months earlier. Breaking the figures down by sector, prices for health services fell by more than any other category, dropping 11.5 percent. FUNDING THE HOSPITALS Nobody is disputing the importance of the lower hospital costs in bringing down the inflation numbers, given their weighting in the index. Vassil Donev/EFE via EPA The question is what that means in practical terms, and whether the 82.8 percent cut is an entirely painless change for Bulgarian hospitals that are often in a poor state of repair. The sums involved are modest — particularly relative to their weight in the inflation index — but they still leave gaps that need to be filled. At a public level, Bulgaria has not explained the rationale for slashing the hospital fee. When contacted by POLITICO, the Bulgarian health ministry said it “supports all policies aimed at reducing the financial burden of healthcare services on households,” noting that the initiative aligns with recommendations from the Council of the EU. In a letter sent to the health ministry after the fee was cut, a number of medical associations clubbed together to urge the government to reverse its decision, stating they opposed the change and the manner in which it was imposed. “We understand from media reports that the reduction in the [hospital stay] fee is being presented as a measure to improve access to healthcare. However, it does not address the structural problems within the system and carries a number of serious risks,” the letter said. It added that the fee “although symbolic, is a source of revenue for medical facilities, of particular importance for [those in] remote areas.” For example, for St. Ekaterina University Hospital in Sofia, the annual loss in revenue from the price drop is estimated at around 40,000 leva (€20,451) according to Bulgarian media. In fact, Bulgaria’s health system is so inadequate that many people already have to pay out of pocket. “At 34 percent [of all health costs], out-of-pocket payments, primarily for pharmaceuticals and direct payments for services not in the benefits package, are the highest in the EU, where the average is 15 percent,” the OECD said in a 2023 country report. ‘DISINFORMATION AND RUMORS’ Bulgaria’s finance ministry pushed back strongly against claims that hospital price adjustments were motivated by euro adoption targets, noting it “has always been a reliable partner in providing statistical financial information and will not allow any disinformation and rumors to undermine the authority of the institutions in Bulgaria.” A spokesman for the National Statistical Institute added that “the NSI only provides statistical data, while decisions are made by other institutions.” Bulgaria’s health system is so inadequate that many people already have to pay out of pocket. | Vassil Donev/EFE via EPA Atanas Pekanov, an economist and a former deputy prime minister in Bulgaria’s caretaker government, said state pricing was not unusual. “There are state-controlled prices in many EU countries. These are not prices that were until recently market-based, and now all of a sudden the state controls them. These are the services [whose prices] the state has always decided,” he told POLITICO. He said that Bulgaria might have met the criteria earlier if inflation in other euro countries had not been artificially capped via emergency measures. “At least we haven’t received any warning or recommendation by European institutions that, well, you are treating your debt in some hidden way,” Pekanov said in a separate exchange. Still, Hanke, who designed the Bulgarian currency board, was wary of Sofia’s inflation claims. He previously developed a formula to estimate the optimal growth rate of the money supply needed to maintain price stability. That benchmark, in Bulgaria’s case, is currently around 6.3 percent. “Since April 2023, Bulgaria’s annual money supply growth rate has been well above 6.3 percent per year. Given the elevated growth rate of the money supply, it looks like Bulgaria’s inflation data have been doctored to look somewhat better (read: lower) than true inflation measures would indicate,” Hanke said. The final decision on Bulgaria’s accession — including setting the conversion rate — is expected to be taken by the Council on July 8. Boryana Dzhambazova contributed reporting.