Germany’s fiscal turmoil exacerbates EU debt risk concerns
Photo: Reuters
Recently, Germany discussed a plan to address a spending reduction issue of up to 600 billion euros, exacerbating industry concerns about the fiscal and debt risks of the European Union. Against the backdrop of high debt levels and difficulty in coordinating fiscal discipline, the region’s economic stability faces significant uncertainty. The Chairman of the Christian Social Union (CSU) and Bavarian Prime Minister, Markus Söder has expressed that the German ruling coalition lacks a comprehensive plan, leading to a serious crisis in the country and making it difficult for the cabinet to fill budget gaps. At the same time, the recent ruling of the German Constitutional Court found that it was illegal to transfer the 600 billion euros of the additional budget for 2021 to the climate protection fund for combating the COVID-19 epidemic. In response, the German Ministry of Finance announced a ban on additional spending before the end of 2023, causing local unrest and being referred to as a huge “spending deficit”.The relevant funds came from a fund established during the COVID-19 epidemic but were not used for the intended purpose. The initial money used for climate protection was part of a climate transition fund worth 1 trillion euros, but it is currently facing obstacles in its use.
Germany’s federal budget 2023 is approximately 476 billion euros, and discussions are likely to focus on raising taxes or canceling debt brake mechanisms in the limited feasible options to make up for the 600 billion euro reduction in expenditure. The debt brake mechanism implemented since 2009 has restricted federal borrowing on behalf of state governments, with new federal debt not exceeding 0.35% of GDP. Finance Minister Olaf Scholz believes that canceling the debt brake is an absolute bottom line, as it is written into the constitution and requires the support of a two-thirds majority in parliament to abolish it. In the current situation, it is almost impossible to achieve a two-thirds majority due to the strong support of the Christian Democratic Union and the Christian Social Union for debt breaks. At the same time, the financial and debt pressures of EU member states are attracting external attention. According to the latest forecast from the European Central Bank, the debt-to-equity ratio will reach 89% this year and slightly decrease to 88.6% next year. This is far higher than the maximum debt-to-GDP limit of 60% stipulated in the EU fiscal discipline. Among EU member states, 11 countries have debt ratios exceeding 60%. Greece has the highest debt ratio, reaching 171% of GDP, Italy ranks second at 144%, and Germany is relatively better at 66%. The European Finance Commission suggests that countries with high debt must find ways to reduce their debt next year. The Chairman of the European Fiscal Board, Danish economist Teis Knuthsen, urges countries to develop long-term debt reduction plans to avoid a repeat of the Greek crisis nine years ago, which could lead to debt loss and national bankruptcy. EU finance ministers plan to discuss the adjustment of EU debt rules at the end of November and strive to reach an agreement at the next EU finance minister meeting scheduled for December 8th. Member countries are striving to strike a balance between large-scale investment and sustainable debt reduction. France advocates flexibility to safeguard public investment and currently has no plans to limit the deficit to 3% by 2027. Italian economists believe that “specific investments” such as green energy should not be included in national debt and debt ratios. Germany opposes the establishment of “specific investments”, believing that it violates fiscal discipline. As Germany addresses budget challenges and the EU discusses debt rules, the delicate balance between fiscal stability and avoiding restrictions on economic growth remains a controversial issue among EU member states. The results of these discussions will greatly affect the financial stability of the region and may affect broader economic strategies in the post-pandemic era.
By Jiashun TANG
