Wednesday

2nd Dec 2020

Germany may change constitution over economic crisis

  • Germany is to boost public spending but wants to contain borrowing at the same time (Photo: EUobserver)

Germany is to take the radical step of changing its constitution in order to ensure excessive public borrowing is prevented, the country's chancellor, Angela Merkel, announced on Tuesday (13 January).

The country is also to impose strict new rules to ensure that the extra debt created by its latest stimulus plan is paid off quickly.

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Ms Merkel made the comments while unveiling a second stimulus plan worth €49.25 billion, to be spent over two years and made up of public investments and tax cuts.

The constitutional amendment would prevent German governments from raising the state's public deficit above 0.5 per cent of GDP "in normal economic times", the Financial Times reports.

This would have capped 2008 borrowing at €12 billion.

The EU's Stability and Growth Pact, which limits Eurozone budget deficits to three per cent of GDP, was relaxed last year as the economic downturn escalated.

In addition to Germany's proposed constitutional change, the finance ministry is to set up a "redemption fund" to ensure the government pays back the latest stimulus plan by a set date.

The redemption fund could collect revenues from future government windfall taxes once economic growth reached a certain threshold.

A similar fund was set up to pay back borrowing related to German unification.

Both measures highlight German fears over the potential long-term damage to Europe's monetary union caused by excessive public borrowing, concerns shared by Belgium and the Netherlands.

In a sign that investors are increasingly differentiating between Eurozone countries, yield margins between German and other Eurozone bonds have widened considerably in recent weeks.

Yet even Germany failed to sell €6 billion worth of government bonds last week, a sign likely to worry other less prudent governments looking to raise money for spending projects.

Portugal receives credit warning

Separately on Tuesday, Portugal received a warning from credit rating agency Standard & Poor's, the fourth Eurozone state to do so in as many days.

On Monday, Spain was warned by the same agency that its rating was in danger of being downgraded, as were those of Ireland and Greece last Friday.

High ratings are vital to enable cheap borrowing on international money markets and any downgrades could prove costly at a time when national governments are looking to spend considerably more than tax returns allow.

Germany asks capitals to give a little in EU budget impasse

European Parliament negotiators are demanding €39bn in new funding for EU programmes such as Horizon research and Erasmus, in talks with the German EU presidency on the budget. Meanwhile, rule-of-law enforcement negotiations have only just begun.

EU budget talks suspended in fight for new funds

MEPs are requesting additional, new funding of €39bn for 15 EU programs. The German presidency argues that budget ceilings, agreed by EU leaders at a marathon summit in July, will be impossible to change without a new leaders' meeting.

EU countries stuck on rule of law-budget link

Divisions among EU governments remain between those who want to suspend EU funds if rule of law is not respected, and those who want to narrow down conditionality.

MEPs warn of 'significant gaps' in budget talks

The budget committee chair said the European Parliament expects tangible improvements to the package in its talks with member states - while the German minister argued that the EU leaders' deal was difficult enough.

Budget deal struck, with Hungary threat still hanging

Ultimately, the European Parliament managed to squeeze an extra €16bn in total - which will be financed with competition fines the EU Commission hands out over the next seven years, plus reallocations within the budget.

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