MNI INTERVIEW: Germany Still Risks Excessive Deficit Procedure

Germany's slower-than-expected ramp-up in defence and infrastructure spending through 2025 is likely to result in a budget deficit compliant with EU fiscal rules, but the uncertain outlook for 2026 and 2027 means the European Commission is still likely to consider an excessive deficit procedure against the country, a member of the EU’s budget watchdog told MNI.

"The deficit in 2025 is more moderate than anticipated. It will be clearly below 3% is my understanding," European Fiscal Board member Eckhard Janeba said in an interview.  

"This may have to do with the fact that spending on infrastructure and defence is just taking time.”

Eurostat will issue a final definitive assessment of the German 2026 deficit in the spring, but the Commission could still justify launching an EDP on the basis of a risk assessment of the outlook. 

Janeba pointed out that official forecasts for Germany’s fiscal shortfalls in 2026 and 2027 are above 3% of GDP - and that is even after the National Escape Clause is taken into account. The clause provides for EU states to spend 1.5% of GDP above the agreed maximum net expenditure path over 20025-2028 in order to increase defence spending. 

Germany's Draft Budget Plan issued in October showed a deficit of 3.75% in 2026 after accounting for the NEC. (See MNI INTERVIEW: German China Plan Likely To Fail - Holtemoeller)

RISK ASSESSMENT

The Commission will need to make a risk assessment of whether the excess deficits for 2026 and 2027 are "exceptional and temporary" or warrant an EDP procedure. This may be as part of its annual economic policy vetting and advice to member states due in the spring.

"With the 2027 deficit above [3%] as well - although not by that much after the NEC - this makes it likely," Janeba said.

October’s German budget forecast puts the 2027 deficit at 3.25% of GDP after allowing for the NEC. Last week’s downgrade to the German government’s growth forecast to 1.0% for this year from a previous 1.3% and the likely rise in government borrowing as a result increases the risk that the deficit may be larger yet.

Janeba urged Berlin not to rely too much on short-term relief from the NEC and to adopt a more robust long-term fiscal strategy, including steps to offset its planned surge in spending and investment.

"There is still some uncertainty over the ambitious reform agenda for 2027 and 2028 in order to generate the deficit reduction that is assumed in 2027 and 2028,” he said.

"The 0.5-point decline in the deficit in 2027 is subject to a major investment and reform strategy. That is still the interesting and relevant question, it is still debated in which areas the reforms will be and also unclear how quickly they can be implemented."