News

Investing.com - A new 500-billion euro special fund may see the German government begin to advocate for reforms of recent European Union fiscal rules, Kiel Institute President Moritz Schularick has told analysts at Jefferies.

Starting from April last year, EU regulations now require member states to maintain budget deficits within 3% of gross domestic product, and public debt with 60% of output.

Eurostat figures indicate that Germany’s debt-to-GDP ratio was around 61% in 2024, leading many economists to flag that plans under the country’s new coalition government to form a large spending package focused on areas like defense and infrastructure may run afoul of the bloc’s rules.

In March, Germany moved to amend its longstanding so-called "debt brake", which had placed limits on borrowing and required German states to run structurally balanced budgets.

The changes particularly allowed for an uptick in defense expenditures, a major issue for German officials wary of a potential waning in U.S. security support and a possible threat posed by Russia. An additional 500-billion euro fund was also created for fresh infrastructure investments.

Under the new spending package, German debt could rise to a long-run level of 100% or more, research from the economic think tank Bruegel found last month.

The EU can grant member states more fiscal space for defense spending through a rearmament package presented earlier this year, although the exception is limited to a maximum of 1.5% of GDP. There is also no such exemption for Germany’s infrastructure initiatives.

Kiel Institute’s Schularick told the Jefferies analysts that the EU’s fiscal constraints may need to be loosened for Europe to meet its spending needs.

Former European Central Bank President Mario Draghi estimated in 2024 that the EU would need to invest an additional 800 billion euros a year to keep up with its global rivals -- or up to 5% of GDP. This would be higher eventhan the 1%-2% of EU GDP in the Marshall Plan set up in the wake of World War Two.

Related articles

Could Germany’s massive spending plans lead it to push for EU fiscal reforms?

’From Tariff Man to Global Salesman’

Moody’s downgrades U.S. Sovereign Credit Rating amid fiscal pressures