Germany is poised to undertake a significant fiscal policy shift as its parliament votes on a proposal to relax the nation’s stringent debt restrictions, primarily to fund defence enhancements and infrastructure projects.
The proposal includes a €500 billion infrastructure fund and adjustments to the constitutional debt restrictions to allow increased defence spending, marking the first step in a departure from Germany’s traditional fiscal conservatism.
In anticipation of this vote, the euro has appreciated, reaching a five-month high against the US dollar, and the German DAX stock index has risen 1%, suggesting market approval of the anticipated policy changes.
Newspage asked experts what short- and long-term economic impacts of Germany’s proposed increase in public spending could be, whether this policy shift could set a precedent for other EU countries regarding fiscal policy and debt regulations, and what the potential risks are that are associated with increased borrowing, particularly concerning inflation and public debt sustainability.
Also, could Germany’s increased spending trigger calls for looser UK fiscal policy?
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Newsletter said, “Germany’s once unshakable commitment to fiscal prudence is giving way to a bold new era of public investment, with the Bundestag moving towards loosening constitutional debt rules.
“This could potentially set a precedent that could spread across the entire EU economic framework. The injection of substantial fiscal stimulus promises to ignite economic activity within the country, with the multiplier effect likely to propel GDP growth significantly above current forecasts.
Additionally, the strategic reallocation of resources towards critical infrastructure and defence not only addresses urgent geopolitical concerns but also aims to resolve deep-seated productivity constraints, with low public investment often being criticised for hindering growth and competitiveness. From across the Channel, the decision of Europe’s fiscal stalwart to abandon austerity orthodoxy could amplify the domestic debates around loosening fiscal policy in the hope of stimulating the UK’s sluggish economic growth.
Harry Mills, Director at Oku Markets said, “Germany’s anticipated shift from fiscal conservatism under its 14-year ‘debt brake’ policy, which has limited structural budget deficits to 0.35% of GDP to ensure long-term stability, reflects the seriousness of Europe’s recent underspending on defence.
“This policy shift should send a clear signal to other European countries to follow suit in increasing defence budgets given the prospect of supporting peacekeeping in Ukraine and any ongoing Russian threat.
“The United Kingdom has pledged an increase in defence spending to 2.5% of GDP by 2027, and an ambition to hit 3% in the following years. This is to be funded by a reduction in foreign aid and, very likely, even more tax rises. Germany’s increased spending has a high degree of headroom, with debt-to-GDP levels around 63% and about €2 trillion of debt capacity per a recent FT survey of economists.
“The UK, however, is bloated with debt close to 100% of GDP. It cannot afford even looser policy without even more ‘difficult decisions’.”
David Belle, Founder and Trader at Fink Money said, “The current furore over Germany is largely smoke and mirrors. Germany has been using special funds for ages to get around the debt brake. All they’re doing now is formalising the debt brake rise.
“The special funds amount to nearly EUR1tn of debt outside the official budget, meaning typical German accounting fraud is still rife. The German Audit Court has been annoyed at Lindner the Finance Minister for a while over this. So I do not quite understand the recent clamouring over the rise in the debt brake.”
