Germany unable to satisfy EU spending guidelines Berlin itself pushed for

The German government is scrambling to meet tough new European spending rules Berlin itself pushed for, as the country’s economy continues to struggle and the nightmare prospect of a two-year recession looms.

The Eurozone‘s largest economy missed an October 15 deadline to submit a spending plan to the European Commission, with civil servants still working to put together a budget which complies with the new legislation.

Officials in Berlin are now reportedly weighing up whether to ask for permission to spread out planned spending cuts over seven years rather than they four they had intended.

It was Germany which pushed to make the new rules as stringent as possible, and as recently as last week the country’s finance minister Christian Lindner appeared to criticise countries which were opting for seven years.

The hardline finance minister, who insisted on imposing targets to encourage countries to get their debt down, called on Germany’s European neighbours to get their finances ‘in order’ and take ‘unpopular decisions’.

Now Germany’s growing economic problems are making it more difficult for the industrial power to meet the targets themselves, with one European official commenting: ‘It’s karma, no?’

German finance minister Christian Lindner recently called on fellow Eurozone leaders to make ‘unpopular decisions’

Germany’s strength was due to the cheap Russian energy it used for industry and functioning global markets for its exports. Pictured: Steam rises at a gas-fired power plant in Germany

An EU diplomat who is said to have revelled in the news also told POLITICO: ‘As Alanis Morissette sang: ‘Isn’t it ironic?”

While the possible extension request has attracted raised eyebrows and Germany’s next steps will be heavily scrutinised, it is permitted under EU rules.

The new rules stipulate that countries whose debt is more than 60 per cent of their gross domestic product must reduce their budget deficit by 0.5 per cent of GDP per year on average – which can be spread across multiple years to soften the blow.

Lindner insisted on the numerical targets when the rules were being drafted, while the European Commission was hesitant to include the unpopular fiscal adjustments.

While Germany remains the largest economy in the Eurozone it is also one of the worst performing.

Germany‘s economy was already the weakest among its larger eurozone peers and other G7 countries last year, with a 0.3 per cent decline in GDP. 

If economic output contracts for a second consecutive year, which last happened in 2002-2003 when exporting and manufacturing industries struggled, Germany would be the only G7 economy in contraction, according to the latest projections of the International Monetary Fund. 

Germany’s export-orientated economy has not grown strongly since 2018 due to structural problems and geopolitical challenges, according to experts.

Its previous strength was due to the cheap Russian energy it used for industry and functioning global markets for its exports, both of which have been impacted by geopolitical tensions and weak global demand.

German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen address the media during a press conference at the Chancellery following the Berlin Process Summit 2024 on October 14, 2024

With strict limits on borrowing over the past two decades and relatively low spending on physical infrastructure, its military and other areas, Germany is serious in need of investment.

Peter Bofinger, an economics professor at Würzburg University, wrote earlier this year: ‘Germany has become sick. But it could be cured if it were willing to change its lifestyle and take the medicine needed to regain its health.

‘The medicine is public debt deployed as an engine of growth – not by reducing taxes and accompanying transfers but by increasing public investment to stimulate domestic demand and the emergence and deployment of new technologies.’

But Lindner warned last week that the government may have to make further savings in its 2025 budget to comply with EU rules, despite room for borrowing allowed under Germany’s own balanced budget law.

If economic output contracts for a second consecutive year, Germany would be the only G7 economy in contraction, according to the latest projections of the IMF

Enshrined in its constitution, Germany’s debt brake restricts its budget deficit to 0.35 per cent of GDP. 

Germany could raise an additional 5.2 billion euros (£4.3 billion) more debt while complying with it, for a total of 56.5 billion euros, due to the government’s weaker economic forecasts.

But European rules also impose limits on a country’s overall debt-to-GDP ratio, and require a plan to bring this within targets.

‘The European rules do not allow Germany to have higher expenditures than the debt brake,’ Lindner said. ‘We would have to break European law for more spending.’