The federal government has always put pressure on Brussels for strict debt rules. Now she may have a problem of her own.
In Brussels, the German finance minister is actually seen as an advocate of strict spending rules for the capitals. But now, of all people, Christian Lindner (FDP) is facing problems with the EU debt rules, which he himself negotiated so hard. One reason is the poor expectations for the development of the German economy.
According to finance ministry circles, the federal government is therefore considering asking the EU Commission for more time to adjust its spending. Instead of a four-year plan, Germany could then draw up a seven-year budget plan.
What requirements has the EU given Germany?
The European debt rules apply to all EU member states. The set of rules, also known as the Stability and Growth Pact, stipulates, among other things, that the debt level of a member state must not exceed 60 percent of economic output. At the same time, the general government financing deficit must be kept below three percent of gross domestic product (GDP).
Anyone who crosses the borders risks criminal proceedings. Highly indebted countries with debt levels of over 90 percent must also reduce their debt ratio by one percentage point annually, and countries with debt levels between 60 and 90 percent by 0.5 percentage points. Germany is currently in the second category: The Ministry of Finance assumed in June that the debt ratio would be around 64 percent this year.
In order to ensure sound finances, each country must draw up a four-year budget plan together with the EU Commission. This should actually have been submitted by mid-October. However, Germany – like many other countries – has not yet done this. They said they were in contact with the Brussels authorities.
Why does Germany want more time now?
Four years might not be enough for Germany to meet the Brussels requirements. But Lindner really wants that. Because he believes that the Federal Republic must be a role model and “anchor of stability” in the EU so that other countries do not become even more indebted.
Lindner’s core problem: It is no longer enough for Germany to comply with its own debt brake, which is anchored in the Basic Law. The EU takes a longer-term view of a country’s sustainability – and in its guidelines also takes into account, for example, the aging of society, the resulting lack of workers and economic forecasts. Germany performs poorly here: in the long term, only low growth is expected, especially when the economy is operating at optimal capacity.
Second problem: Because 2024, with its poor economy and the planned supplementary budget, will bring a higher deficit than originally expected, the acute need to adapt to the EU requirements is surprisingly large. So even more savings would be necessary, not just at the federal level, but possibly also in the states and municipalities. “It is possible that national financial policy needs to be more ambitious,” said the chairman of the independent advisory board of the Stability Council, Thiess Büttner, recently to the “Frankfurter Allgemeine Zeitung”.
What would Germany’s request for more time mean?
If Berlin requests that the budget plan be drawn up for seven years instead of a four-year one, this will not be a violation of EU debt rules. These allow expansion under certain conditions – for example if a country commits to growth-promoting reforms and investments. Germany would have to prove this in order to get an extension.
What is the situation in other countries?
Other countries have repeatedly criticized excessively strict debt limits – among other things because they could inhibit investments in, for example, the green transformation. In addition, some countries have much higher debt ratios than the Federal Republic. According to data from the EU statistics office Eurostat 2023, the highest were in Greece, Italy, France, Spain and Belgium. In recent weeks and months, some countries have already announced that they would like to submit a seven-year budget plan to the EU Commission.
Last week, when, according to him, the budget was still being prepared in Berlin, Lindner was slightly critical of this at a meeting with his EU counterparts in Luxembourg: “We see that other member states have already decided on a seven-year period. ” He is convinced that ambition is needed to keep or bring public finances in order. “And that’s why I can only encourage everyone to initiate structural reforms and perhaps sometimes make unpopular decisions.”
What does the situation mean for the federal budget – and also for states and municipalities?
Without the postponement, the federal government, states and municipalities would have to save additional money in the coming year in order to reduce spending growth to the value set in Brussels. Given the already difficult budget negotiations, where every euro is being turned around in the Bundestag, this will probably be difficult.
All of this gives Lindner new leverage in the current traffic light debates about pensions and the planned growth package. This initiative with tax relief for the economy, work incentives and cheap electricity for industry is now likely to become even more important. The federal government assumes that the measures will have a positive impact on long-term economic development. This increases the pressure on the states to agree in the Federal Council and to accept losses in tax revenue.
Source: Stern
