Lindner claims Germany must meet EU austerity requirements that do not exist
The German finance minister is deceiving the public over fiscal consolidation
This is an English translation of my Handelsblatt column, which first appeared in German here.
There is no end to the internal coalition dispute in Germany over fiscal policy. Finance Minister Christian Lindner (FDP) is staging himself as an austerity champion who is putting a stop to the spending wishes of his coalition partners. For him, the debt brake is sacrosanct and must not be relaxed. The new EU fiscal rules, Lindner claims, will even create additional pressure for spending cuts in the coming years.
The finance minister is deceiving the public with this game of alleged EU constraints. Experts have known for months that the consolidation requirement for Germany to comply with the new EU fiscal rules is low. The Brussels-based research institute Bruegel has calculated that Germany could even reduce the fiscal consolidation requirements to almost zero if it were to submit an acceptable investment and reform plan to the European Commission.
Source: Darvas et al. (2024).
In this case, according to Bruegel's calculations, Germany would have to improve its structural primary balance by just 0.02% of economic output per year in the period from 2025 to 2031. The primary balance is the headline fiscal balance excluding interest payments, calculated for a hypothetical “normal” business cycle position (i.e. corrected for cyclical conditions based on potential output). For France and Italy, on the other hand, the fiscal consolidation requirements is 0.6 percent per year and for Spain 0.5 percent. France and Italy must therefore consolidate substantially in order to comply with EU fiscal rules, Germany only marginally.
Source: Heimberger et al. (2024)
The budget plan drawn up by the Ministry of Finance for 2025 envisages an improvement in the structural primary balance of 0.75% of GDP. This is much more than the 0.02% that would be required per year with the investment and reform plan. Even without an investment plan, the European Commission would only require 0.11%.
Although the deadline of October 15 has already passed, Germany, unlike most other EU countries, has not yet sent a multi-year budget plan for the coming years to the European Commission. It is reasonable to assume that Lindner is delaying the official submission to the EU Commission so that he can continue to misuse the new EU fiscal rules as leverage in the national budget debate.
The European Commission has now published the calculations for the consolidation requirements for all countries that submitted their multi-year fiscal-structural plan by the mid-October deadline. Some member states, such as Austria, published the reference paths, which were initially submitted in secret in June, immediately.
The opinion of the Stability Council's advisory board also does not provide any good reasons for delaying the submission of the plan. The higher expenditure in 2024 discussed by the Stability Council is not relevant for compliance with the rules. What counts are the consolidation requirements calculated on the basis of the spring forecast data: The “safeguard” for the public debt ratio mentioned by the Stability Council does not apply to Germany in the European Commission's reference path. Germany’s Ministry of Finance should not take any steps that require a more restrictive fiscal policy than required by the European Commission. Otherwise there is a risk of a further slowdown in economic growth.
Lindner is in favor of a more restrictive fiscal policy for political and ideological reasons. However, he should have to argue for this on substance without deceiving the public with wrong claims about austerity constraints due to EU fiscal rules that currently do not exist for Germany.