Germany in EU Budget Doghouse Again

Die Zeit today brings doleful news: Germany has a relapse! What the unnamed journalist (no by-line) is referring to here specifically is what he calls the “Maastricht Criteria,” according to which EU member-states are supposed to keep their government budget deficits to 3% of GDP or less. (That’s OK as a name, but it would be more accurate to call this requirement part of the Stability and Growth Pact that was agreed to as a pre-condition for the establishment of the euro.) Sure enough, the European Commission now calculates (in a report released today) that the German debt this year will amount to a full 3.9% of GDP – and next year even 5.9%! And all this, the Die Zeit article notes, just two years after Germany had managed to get itself out of the Commission’s bad graces (actually, out of a full-scale official EU “penalty process”) for violating this rule!

Well, to offer a quick bit of economic analysis: No sh–, Sherlock! Of COURSE German government debt is mounting – doesn’t the Commission know that there is a serious recession going on? In such a recession, by definition, government tax intake shrinks along with business profits and personal income, while social welfare outlays for counteracting its effects swell! This article really gets surreal when, after that leading bit about Germany seriously violating the rules again, it then goes on to devote most of its remaining length to reporting how everyone now calculates that the effects of this recession will be far worse than previously anticipated. That same Commission report now forecasts an over-all 4% shrinkage of GDP in the EU as a whole this year (twice as much as previously forecast), with a further -0.1% next year. For Germany specifically it forecasts -5.4% this year and +0.3% next, while the German government itself expects -6% this year, +0.5% next.

Then again, we need to think clearly here: the EU Commission has provided the report with all the damning statistics, but it’s not certain whether they are really trying to make a big deal out of it – while that is clearly what Die Zeit desires to do. I mean, at the article’s very end we are ominously informed that the current German government has now managed to break the old record for government debt. (That used to be €40 billion, first set back in 1996 under Helmut Kohl; you can be sure that the Commission’s report itself carried no mention of that.)

All of this public Angst reflects a quite remarkable German attitude towards government debt. That subject – in particular, precisely in relation to the Stability Pact that is supposed to hold it to less than 3% of GDP – has long been a subject of interest for this weblog, starting from way back in 2003 when both Germany and France found themselves slipping over that 3% line even in relatively prosperous time but managed to get away with it without suffering any of the sanctions from the EU that were supposed to result. (Those two are, after all, the EU’s main two founding-states and powerhouse nations.) Then last December, as I also covered in this space, the German government’s top officials (Chancellor, Vice-Chancellor/Foreign Minister, and Finance Minister) were all confident both that their nation could stay within that 3% limit and insistent that other member-states should do the same – this back when the economic storm was already breaking and any country holding to that limit really no longer made sense, regardless of any treaty obligations.

Now fiscal reality has finally intruded on that German government, and it finds it’s going to have to considerably overshoot 3% of government debt this year and next. The leading commentary newspaper, at least (and that’s of course Die Zeit), seems to be upset about that; we’ll need to see from any governmental pronouncements in the near future whether the authorities are as well. That seems very likely; after all, there is a parallel push going on to add a so-called Schuldbremse (“debt-brake”) to the German constitution, which is basically the sort of “balanced-budget amendment” that has cropped up occasionally in the US Congress.

But that not anytime recently – because even the US Congress has enough sense to know that there are serious economic times that demand a more relaxed attitude to government spending and debt. Does the German government realize this too? That is doubtful; and one unfortunate thing is that, because of her economic importance, all the rest of Europe will likely suffer if she is making a big economic-policy mistake.

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