German Coalition Open to Looser Short-Term EU Budget Rules

Michael Nienaber
·2 min read

(Bloomberg) -- Germany’s ruling coalition is open to changes to European Union budget rules which would give highly-indebted member states more leeway in the short term but mean stricter medium-term goals.

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The three parties in Chancellor Olaf Scholz’s governing alliance agreed that Germany would support watering down a requirement for annual debt reduction if mid-term budget objectives were made more binding, according to a document seen by Bloomberg.

The EU’s Stability and Growth Pact requires the 27 member states aim for budget shortfalls of less than 3% of gross domestic product and debt below 60%. Few nations currently meet the targets, and the twin shocks of the pandemic and the war in Ukraine have given the bloc new impetus to consider an overhaul of its fiscal framework.

The European Commission said in March that a sharper focus on medium-term targets was “a promising avenue” in the divisive debate over budgetary oversight.

The EU executive -- which is expected to publish its proposal for overhauling the fiscal rules in the fall -- favors giving more space to member states to determine their debt-reduction plans while making sure a better enforcement mechanism is in place.

After weeks of negotiations, Scholz’s center-left Social Democrats and the pro-spending Greens sealed a deal with the more fiscally conservative Free Democrats led by Finance Minister Christian Lindner.

The three parties outlined their joint position in three-page paper which will now be sent to Brussels and other European capitals.

They signaled their willingness to put more emphasis on public-sector investments, agreeing that a higher level of spending would help boost long-term growth and speed the shift to a climate-neutral economy.

The coalition backs a “limited extension” of the flexibility clause for investments so that it can be used in normal times and not just during an economic crisis.

(Updates with details from paper starting in fifth paragraph)

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