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Cabinet officials

Germany's Fiscal U-Turn: A Challenge to EU Rules

Strategic Insights

— 2 min read

Germany, long a proponent of strict budget rules within the EU, is now seeking to relax these guidelines as it embarks on a massive spending drive, part of a €1tn stimulus plan to re-arm and revive the Eurozone's largest economy. This shift has raised questions over the merits of rules that even their champion no longer sees fit to maintain. Berlin's finance minister, Lars Klingbeil, is pressing to invest billions in the country's armed forces and infrastructure, despite the fact that this will likely put Germany in breach of EU limits it has helped design.

Key Takeaways:

  • Germany's debt ratio stands at 62 per cent of GDP, while lower tax receipts are expected to widen the deficit, leading to concerns that debt could rise to about 80 per cent of GDP over the next years.
  • The country's new fiscal thinking is expected to breach EU rules, particularly after it starts spending its €500bn infrastructure fund, according to research by think-tank Bruegel.
  • The Stability and Growth Pact, which limits budget deficits to 3 per cent of GDP and public debt to 60 per cent of GDP, has a haphazard history of enforcement, with both Paris and Berlin falling foul of it in the early 2000s without incurring sanctions.
  • The EU Commission has granted a national escape clause, allowing countries to spend up to 1.5 per cent of GDP on average over four years on defence-related expenditure without incurring punitive measures.
  • Sixteen EU members, including Germany, Poland, and the Baltic states, have requested to use the exemption, while France has opted not to, citing its high debt-to-GDP ratio and forecast deficit.
  • The German finance ministry plans to argue that its big spending programme will boost potential growth in Europe's largest economy, while also emphasizing the importance of structural reforms outlined in their coalition agreement.

Statistics:

  • Germany's debt ratio stands at 62 per cent of GDP.
  • The country's deficit is expected to widen due to lower tax receipts.
  • Debt could rise to about 80 per cent of GDP over the next years.
  • The EU's Stability and Growth Pact limits budget deficits to 3 per cent of GDP.
  • Public debt is limited to 60 per cent of GDP.
  • The EU Commission has granted a national escape clause, allowing countries to spend up to 1.5 per cent of GDP on defence-related expenditure.
  • Sixteen EU members, including Germany, Poland, and the Baltic states, have requested to use the exemption.

Sources:

  • Anne-Sylvaine Chassany - Berlin
  • Paola Tamma - Brussels
  • HEC professor Armin Steinbach
  • European Commission
  • Bruegel think-tank
  • German finance ministry
  • French official

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