The federal government has agreed on a common position on how the debt rules in the euro area could be reformed from a German perspective. “For us as the federal government, it is important that Germany is able to speak at an early stage,” said a member of the government on Friday, with a view to the European debate, which is likely to pick up speed in the fall. In essence, Germany advocates that the applicable rules remain in place, but become “clearer, implementable and monitorable”.
The Stability and Growth Pact lays down the rules of the game in monetary union and is intended to ensure budgetary discipline. Among other things, new borrowing may not exceed three percent of gross domestic product in economically normal times. The national debt must not exceed 60 percent. The only problem is that both quotas are constantly being disregarded by the euro countries. For some countries, the debt ratio in particular now seems unattainable. Therefore, the rules should be reformed. In short, Berlin’s motto is: Goals that are inaccessible anyway do not serve to stabilize, but rather invite you to bypass them.
The basis for the German proposal, which goes back to Federal Finance Minister Christian Lindner (FDP), is the coalition agreement. It says: “We want to strengthen and deepen the economic and monetary union.” The pact has “proven its flexibility”, but it should “become simpler and more transparent, also in order to strengthen enforcement”.
With the new rules, countries like Italy or Greece would have more room for manoeuvre
The government paper now lists “debt sustainability and ensuring sound budgets” as the core objectives of the framework. The “implementation of a stability-ensuring and growth-friendly debt reduction path” is called for, in which budget deficits are gradually reduced. In normal times, buffers would have to be built up.
Debt levels should be reduced, but always “in relation to economic performance”. This means that a country could also grow out of its debt, because if the economy is growing strongly, the debt ratio will fall even if debt is reduced only slightly or not at all. In this way, highly indebted countries in particular should retain fiscal leeway.
The government is signaling a willingness to change with the controversial twentieth rule. In fact, countries with a debt ratio above 60 percent have to reduce a twentieth of the difference between their actual ratio and this target every year. But that is hardly feasible for countries like Greece or Italy. In order to “avoid unrealistic adjustment paths”, the traffic light government therefore proposes that compliance with the twentieth rule can be waived if instead there is a binding debt reduction path to a fixed budget target.
At the end of May, the Commission announced that it would suspend the EU debt rules again in 2023 due to the crisis, against Lindner’s will. With a view to rising interest rates and inflation, however, government circles said on Friday that the circumstances under which debt was discussed in Europe had “significantly” changed. Berlin now senses the “general understanding that debt cannot solve all problems”.