Friday

22nd Jan 2021

Germany stops accumulating fresh debt

  • Record budget revenues spell good news for the German economy (Photo: svenwerk)

The German government on Monday (12 January) confirmed media reports that the country for the first time since 1969 will not accumulate fresh debt - one year earlier than previously envisaged.

Record tax revenues of €278 billion, €10 billion higher than in 2013, low unemployment, coupled with near-zero interest rates on outstanding German national debt, meant that in 2014, the government broke even and did not need to raise extra money on the markets.

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Initially, finance minister Wolfgang Schaeuble had earmarked €6.5 billion in fresh debt for 2014 and said that in 2015, the budget will be balanced.

Ever since 1969, no other German government has managed to avoid raising fresh debt, with a burden of over €1.3 trillion accumulated over the years.

Breaking the debt cycle will likely give Germany even more authority in the European discussions about how to apply EU deficit and debt rules, be it for France, who is struggling to keep public spending in check, or for Greece, where upcoming elections may bring anti-austerity Syriza to power.

The European Commission on Tuesday is set to present its own interpretation of what it understands by "flexibility" when applying the Stability and Growth Pact - which limits national deficit to three percent of the gross domestic product and national debt to 60 percent of GDP.

The commission had previously said part of the "flexibility" means no country will be punished for running a higher deficit if that deficit is caused by contributions to an upcoming EU investment fund.

But according to a draft seen by EUobserver, the commission will also include exemptions from the deficit and debt rules when it comes to national contributions to EU-funded projects and to "major structural reforms".

"Some investments deemed to be equivalent to major structural reforms, may, under certain conditions, justify a temporary deviation ... from the adjustment path," the draft reads.

The conditions for such an exemption are for the country's economy to be in recession or with growth "well below its potential", for the investments to be co-funded by the EU and for the deviation not to breach the three-percent deficit ceiling.

Likewise, structural reforms have to be "major", "with long-term budgetary effects" and above all, "implemented", could trigger lenient treatment of a country's deficit and debt.

If reforms are to be considered before their implementation, countries need to produce a dedicated plan with "verifiable and time-bound information" that will be monitored under the European Semester - a budget scrutiny system run by the European Commission.

EU economics commissioner Pierre Moscovici is to present the final document on Tuesday after adoption in the college of commissioners.

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