Remember the Germany proud by your fiscal austerity And by the economic force since the early 2000s? It became a memory of the past. The rigid fiscal control in the governments of Angela Merkel and in the long time when the finances were under the care of Wolfgang SchäubleIn fact, today it is criticized even by conservatives. German economic policy of recent times has followed a common line to several other nations.
As part of the negotiations to form a coalition with the center-left SPD, the new CDU Centrist CDU of the new Chancellor Friedrich Merz has relieved the constitutionally established “debt brake” of an annual deficit of a maximum of 0.35% of GDP.
The debt brake became legally binding to the federal government in 2016 and the states in 2020. In 2014, Schäuble had already managed to present a balanced budget of the country for the first time in 45 years. The term “Zero Black” was coined to mark Schäuble’s conquest and became a political slogan, with expenses and revenues converging for balance
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But the amendment approved by Parliament last March established that defense expenses of more than 1% of GDP will not be subject to any debt limit.
In addition, a € 500 billion extracting fund was created for additional infrastructure spending, of which € 100 billion will be intended for climate -related investments. This should give some increase to economic activity, which now detested from the negative side of the European peers. The deadline for spending on this fund is 12 years.
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And the country is still pressured by the assumed commitments to help Ukraine and its war with Russia. Thus, you should not escape the “suggestion” of the United States so that allies in the organization of the North Atlantic Treaty (NATO) raise their military spending to the equivalent of 5% of GDP. They would be 3.5% directly linked to weapons and ammunition and 1.5% related to defense infrastructure. Today, Germany spends just under 2%in total.
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By Germany’s own calculations, each percentage point of increased these expenses is equivalent to 50 billion euros annually. NATO should set the new limits and goals in June.
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This “reality shock” in Germany is ironic. The duo Merkel and Schäuble was the main architect of an EU plan to offer Greece a limit of up to five years to solve their tax problems or leave the euro zone, a plan called by the Grexit media. And in 2017, Germany’s Finance Minister criticized Brussels for the decision not to apply sanctions to Portugal and Spain for failing to meet their deficit goals.
As the Financial Times In a recent report, Germany was so proud of its austerity that there was a monument with a huge black zero, which represented the country’s commitment to a balanced budget. Zero first changed color to green, and then was retired and is hiding today in a warehouse. And more than one locality were digital clocks showing the country’s debt.
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The German debt control apparatus began to receive criticism when the country flirted with the recession in 2019. Those who opposed the current tax rule felt that Germany had wasted years of healthy finances that could bring the opportunity for reinvestment in innovation. This has become a harbinger of the 2020s turbulence.
Then came the Covid-19 pandemic, which interrupted supply chains, while the Ukraine invasion of Russia and subsequent sanctions cut from Germany the supply of cheap oil and gas vital to his industry. An additional drop in demand in a crucial export market, China, aggravated problems for Germany’s largest companies, particularly for car manufacturers.
Now, according to calculations of the Think Tank Broegel, it is certain that German debt will increase, although it may remain in sustainable level. Assuming nominal growth between 2.5% and 3% and long -term military spending from 3% to 3.5% of GDP, debt should converge to around 100% of GDP.
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But this turn in German finances can create complications in European governance. The European Union’s fiscal rules admit the elevation of defense spending, but make it difficult to use an infrastructure fund. To allow higher German expenses, the rules may have to change, for example, defining the “reference value” to debt from 60% to 90% of GDP.
And new German military spending can exacerbate the fragmentation of the European defense industry, as the government intends to focus on internal supply. From the point of view of the defense and the EU, this makes no sense, according to Broegel.
(With information from Reuters, Financial Times, Die Zeit, Deutsche Welle and Der Spiegel)
