MNI INTERVIEW: Germany Needs Favourable EU Fiscal Treatment

Germany will need to keep its EUR850 billion defence and infrastructure plan strongly "investment orientated" and receive favourable treatment from the European Commission in order to ensure compliance with EU fiscal rules, the new German member of the bloc's fiscal watchdog told MNI.

"How the money is spent makes a huge impact on growth and so on the debt-to-GDP ratio," said recently-appointed European Fiscal Board member Eckhard Janeba, noting that the spending plan will inevitably boost debt-servicing costs as Germany's borrowing increases in the years ahead and would increase interest rates if the money is spent on consumption rather than investment.

Under the fiscal rules, countries with public debt of over 60% of GDP have to put it on a declining trend by the end of their four- or seven-year debt consolidation plans. 

Janeba noted in an interview that there has already been some leakage from Germany’s special fund into the country's main budget.  

"There seems to be some substitution between the core budget and the special fund. That would lower growth and so would increase the debt-to-GDP ratio and so would be a problem for the EU debt safeguard,” he said.

Janeba believes the Commission will nevertheless take a benign view of the impact of the German package when it is submitted at the end of July, based on the assessment made by EC economists in their recent annual economic advice to Germany and other EU states. (See MNI INTERVIEW: France Ready To Join SAFE Loan Facility)

"The increase in deficit and debt [as estimated by the Commission] seemed relatively modest. That seemed to me that they might provide a favourable outlook on the fiscal and economic consequences of the package."

ESCAPE CLAUSE 

Germany has applied for a national escape clause from the fiscal rules for its increased defence spending and will try to squeeze as much flexibility out of the EU as it can, Janeba said, adding that the Commission has become more politically sensitive to the impact of overly tight fiscal rules on EU governments struggling with the rise of populism.

Berlin is also likely to apply for an extended seven-year plan, to allow time for its investment plan to boost economic growth, he said.

For the rest of Europe, potential spillovers from the massive German spending plan might bring "mixed blessings.” 

"If the German economy picks up then there will be positive spillovers in terms of growth and additional demand for other member states' output,” he said,  but he added: "Additional borrowing is likely to raise German interest rates and, insofar as German rates act as an anchor for those of other countries, that could lead to higher rates for them too. Those countries with higher debt-to-GDP ratios could suffer." (See MNI: Additional EU Defence-Financing Prospects Bleak)

There is also a risk that if the Commission takes a very soft line on Germany that this could lead other countries to relax their efforts to be fully compliant with the EU's fiscal rules, he said.

Janeba is also a professor at the University of Mannheim and a member of the Board of Economic Advisors to the German Federal Ministry of Economic Affairs and the Scientific Advisory Board of the German Ministry. He said his views are personal and do not necessarily reflect those of the five-member EFB itself.