BRUSSELS — Germany has long been the European Union’s penny pincher par excellence — a paragon of fiscal rectitude in contrast to its spendthrift neighbors. But now its insistence on balancing the books is coming back to bite.
To some surprise, Germany missed an Oct. 15 deadline to submit a multi-year spending plan to the European Commission as officials in Berlin scramble to put together a budget that complies with recently introduced European spending rules. It is now considering asking the Commission for permission to spread out planned spending cuts over seven years, rather than four as initially intended.
“It’s karma, no?” said a European official who played a key role in negotiating the updated fiscal rules — the same ones Berlin pushed to make as stringent as possible.
They weren’t the only ones reveling in the exquisite Schadenfreude. “As Alanis Morissette sang: ‘Isn’t it ironic?’” one EU diplomat quipped.
Under the bloc’s revised regulation, countries whose debt exceeds 60 percent of their gross domestic product must reduce their budget deficit by 0.5 percent of GDP per year. But this is an average, and by spreading the adjustment over more years the cuts can be made less extreme, to spare the economy if it suffers a recession.
Ironically, it was Germany’s hardline finance minister, the liberal Christian Lindner, who insisted on that provision when the rules were being drafted. The European Commission preferred not to include binding numerical targets, wanting to avoid the kind of brutal, politically unpopular fiscal adjustments seen in the last eurozone crisis.
But Germany’s growing economic difficulties have made it more difficult to meet the targets. Berlin recently admitted that the country’s economy is likely to contract for the second year in a row this year, having earlier expected modest growth. That means less tax revenue and more debt: According to budget plans recently submitted to Brussels, the government raised its deficit projection for 2024 to 2.5 percent of GDP from the 1.8 percent it forecast in the spring.
Bad timing
But the ironies continue to pile up.
Just last week Lindner appeared to criticize countries like France and Italy, which were opting for a longer, seven-year fiscal adjustment period, and called on other European capitals to put their finances “in order.”
“We see that other member states have already opted for a seven-year period,” Lindner said on the sidelines of a meeting in Luxembourg. “I can only encourage everyone to introduce structural reforms and also to take sometimes unpopular decisions.”
It should be noted that Germany’s possible request for an extension — while perhaps raising eyebrows — is allowed under EU rules.
“Germany asking for an extension is a political choice that is completely normal,” said Nils Redeker from the Jacques Delors Center think tank in Berlin.
But there’s a price attached: Due to yet another German demand during the negotiations, countries that want extra time must commit to a specific reform package.
“What is important now is that they propose reforms and investments to address … its business model, and not simply to secure an extension. The Commission will pay attention,” said Marco Buti, an academic who ran the EU’s economy department from 2008 to 2019..
Quite simply, Germany is in dire need of investment. Due in part to a constitutionally enshrined cap on borrowing, public investment in physical infrastructure over the past two decades has been just enough to cover the cost of its maintenance, leaving it treading water in real terms (as is abundantly clear to anyone who has taken a German train recently). Add to that the €100 billion in spending that Chancellor Olaf Scholz has promised to upgrade the country’s antiquated military and to drive its energy transition, and the pressures on the budget become clear.
The standard playbook calls for a healthy dose of government spending that would inject money into the economy to fight the ongoing recession. In theory Berlin has plenty of fiscal room, with low debt compared to its European peers. But the rules it introduced — European and national — tie its hands. A slower rate of cuts may provide a lifeline to the economy — but they are still cuts.
“They are essentially choosing not to stimulate even though they can,” said Daniel Kral, lead economist at Oxford Economics.
Looking ahead, “it’s hard to see any meaningful pick-up,” he added.
European diplomats might be tempted to relish Germany’s current difficulties, given its role as the enforcer of austerity in the previous crisis. But as the eurozone’s largest economy, a problem in Germany eventually becomes a problem for the rest of the bloc, said Davide Oneglia, director of European and global macro at TS Lombard.
What’s certain is that if Germany does request that the Commission ease up on its debt repayment schedule, Berlin will find it harder to take a tough line toward Rome and Paris, should they drag their feet on painful cost-cutting measures.
For now, the country’s fractious coalition government is unlikely to find the agreement needed to change course. National elections next September — in which the opposition center-right Christian Democratic Union party is expected to do well — could provide the political space for an economic reset.
“Germany has all the resources it needs to turn the ship around,” Oneglia added. “If a crisis is what it takes for them to change, then a crisis is welcome.”
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