MNI INTERVIEW:German Debt-To-GDP Risks Sharp Rise-EFB's Janeba

Germany exploited every available loophole in the European Union's fiscal rules when it submitted its seven-year debt plan in July, European Fiscal Board member Eckard Janeba told MNI, calling for Berlin to raise taxes or cut spending to avoid a significant rise in public debt to levels potentially 20 percentage points above EU limits.

Those loopholes include the assumption of an implausible average potential growth rate of 0.9% a year from 2025, the plan’s extension from the standard four years to seven years and the use of the national escape clause, which permits countries to temporarily deviate from EU-approved net expenditure paths for up to four years by a margin of 1.5% of GDP in order to boost defence spending, said Janeba, who joined the Fiscal Board in April and is its only German member.

"Germany has exploited every possibility the rules give in designing its plans which is much more expansionary in the coming years than the reference trajectory that was proposed by the Commission,” he said in an interview.

"I find it implausible that we jump immediately into a higher growth rate right away with this year. But that is consistent with the rules." 

If Germany uses all the space allowed under its plan, then it will have a fiscal deficit of well above 3% of GDP and its debt level will rise well above the EU’s 60% of GDP limit by the end of the decade, Janeba said, pointing to recent Bundesbank calculations of fiscal deficits between 5% and 6% of GDP in the coming years, and a debt ratio of up to 80% by 2029 as an illustration of how high it could go. (See MNI INTERVIEW: Germany Needs Favourable EU Fiscal Treatment )

German public debt is currently equivalent to about 62% of GDP, and the new conservative government has amended its long-standing “debt brake” to allow for an EUR850 billion defence and infrastructure plan.

HIGHER TAXES OR SPENDING CUTS

"What needs to happen is that a significant part of the increase in defence and infrastructure spending is financed by tax increases or spending cuts,” he said, though he noted that "strong dissent" persists between the political partners of the governing coalition as to how consolidation should be achieved. 

"If implemented without further adjustment Germany's deficit will go much higher, clearly above 3%, and the debt ratio will be increasing rather than stable in the medium to long run."

In addition, Germany has also managed to backload the start date for any consolidation effort to 2028-29 - when the current government will be facing elections, making debates on fiscal retrenchment a political minefield. 

"That is a weak commitment. We know that as we get close to elections governments are less likely to take unpopular measures,” Janeba said.

ANCHOR DISLODGED

The Commission has been "very lenient" in approving Germany's plan, reassured by the country's debt starting point, which while above the limit is lower than the eurozone average of 88% of GDP, Janeba said, adding that this could push up financing costs for over countries in the bloc.

"Any increase in the German rate may be much more harmful for countries in a tighter situation,” he said.

"Germany is the anchor in terms of fiscal stability for the eurozone. There is a danger that if we bend or break the rules without sanctions then this creates moral hazard for other countries down the road. So there is not just an issue of fiscal sustainability but also for overall compliance with the rules."   

Common EU borrowing will remain "a hard sell" politically unless it can be guaranteed to be ring-fenced for defence, in which area there is a "strong case" for Europe to play a bigger and better role, according to Janeba.

"It's very hard to make sure it is used for its intended purpose and this is another reason Germany may be more hesitant. It will be a hard sell if it's not guaranteed for the defence purpose." 

Janeba is also a professor at the University of Mannheim and a member of the scientific advisory board to the German Ministry for Economic Affairs and Energy.