BRUSSELS — It was one of the most dramatic and radical policy reversals in European Union history. In less than 48 hours, Germany not only executed a seismic shift in its domestic budget policy but also suddenly pushed to rewrite the EU’s fiscal rules it itself helped to draft.
Brussels welcomed the first move as a long-overdue response to years of urging Germany to invest more, rather than let itself be constrained by a constitutional limit on borrowing.
But the second? That was seen as a unilateral move — an overcorrection that unsettled even Germany’s closest allies.
Events had unfolded at a bewildering speed in the days after the Oval Office bust-up between Donald Trump and Volodymyr Zelenskyy. The United States president’s language toward his Ukrainian counterpart convinced European onlookers that they needed a completely new approach to guaranteeing their own security in double-quick time.
A flurry of ideas followed: The European Commission proposed giving EU countries room to increase their defense spending by 1.5 percent of gross domestic product over four years, while also floating plans to borrow €150 billion in its own name to hasten rearmament around the region.
But that wasn’t enough for Berlin, where chancellor-in-waiting Friedrich Merz and outgoing Chancellor Olaf Scholz were hurriedly thrashing out plans to spend hundreds of billions of euros on rebuilding Germany’s armed forces — and restore its economic vitality more broadly with a splurge on infrastructure.
The trouble was that while Germany’s relatively low level of public debt left space for such plans, they risked violating a fiscal framework that Berlin had fought long and hard to implement at EU level — one that included fines for noncompliance. To avoid the embarrassment and stigma of that, Berlin tried to rewrite the rules to exempt defense spending for at least 10 years.
But here’s the twist: When Germany’s outgoing Finance Minister Jörg Kukies arrived at an EU finance ministers’ meeting last week expecting to secure the exemption, he instead encountered a room of skeptical counterparts warning about debt sustainability and seeking other solutions.
This was not the reception Berlin had anticipated.
A moment of seeming victory quickly unraveled into a reality check for Germany, four diplomats aware of the talks told POLITICO.
The diplomats, like others cited in this article, spoke on the condition of anonymity due to the closed-door nature of the discussions.
“Now the Germans have decided that they do whatever the hell they want. Since the [EU] rules approved six months ago don’t suit them now, they do the opposite, of course without having negotiated anything at the European level,” said Italy’s Finance Minister Giancarlo Giorgetti at a party event on Saturday.
Berlin’s gamble backfires
To understand the mood that day, it’s crucial to revisit how Germany’s unprecedented policy shift unfolded in the first place.
It all began on Tuesday, March 4. Germany’s two dominant political parties — the Social Democratic Party (SPD) and the Christian Democratic Union — reached a landmark agreement on the reform of the country’s constitutional debt brake and on a massive investment plan.
By Thursday, March 6, Scholz’s government had managed to secure a last-minute change to an EU leaders’ joint statement calling on the Commission to explore “further measures” to grant governments fiscal space while reassuring fiscally conservative countries with a reference to “debt sustainability.”
Unsurprisingly, traditional fiscal hawks — many of whom had long been Berlin’s closest allies on economic matters — immediately viewed the move with suspicion.
Increasing debt means bigger interest rates and for many countries the risk is “a lose-lose game,” one diplomat said. “We spend more, we pay more.”
A Spanish government official highlighted during the leaders’ meeting that because the German sovereign bond market is considered a benchmark, when their debt cost increases, borrowing costs for everyone else increase too.
When EU finance ministers convened last week, several nations cautioned Kukies that, at some point, fiscal discipline must be addressed. Three diplomats told POLITICO that even France, a frequent advocate of fiscal flexibility, refrained from supporting Germany’s push to revise the rules.
Another diplomat observed that reopening the discussion now would fuel “skepticism in the system,” not least because the fiscal rules in question have been operational for less than a year.
Countries with stretched budgets such as France, Italy or Spain were in favor of flexibility for longer, but given their limited fiscal space their main concern is being able to benefit from common funding at the EU level at a cheaper borrowing cost.
As European Stability Mechanism chief Pierre Gramegna put it last week: “[Markets] see joint European financing as a better tool than increasing debt at national level.”
Germany’s proposal, by contrast, was a purely national initiative. “They would like to align the EU framework according to their revised debt brake. That was their idea,” said one of the diplomats quoted above.
A lame-duck move
Beyond the policy substance, political dynamics further weakened Berlin’s push.
There was no consensus on the issue between outgoing Scholz’s SPD and Merz, according to a source familiar with the Berlin talks. Merz’s CDU wields significant influence as the largest party in the European People’s Party — the bloc’s most powerful political faction to which President Ursula von der Leyen belongs.
With Scholz’s government in its final days, Kukies was perceived as a lame-duck finance minister.
By Tuesday last week, Germany’s fate was all but sealed.
Summing the saga up on Tuesday, Economy Commissioner Valdis Dombrovskis told a group of media including POLITICO that “Germany has room for maneuver under the European rules.”
Rasmus Buchsteiner contributed to this report.
The post How Berlin’s fiscal flip stunned Brussels and spooked its allies appeared first on Politico.
