CashNews.co
BERLIN (Reuters) -New EU rules further restrict Germany’s fiscal space for its budgets, and more consolidation will be needed in the coming years to comply with European regulations, two finance ministry sources said on Wednesday.
Germany received an adjustment path for the next four years from the European Commission in June, which served as the basis for a draft budgetary plan submitted by the country on Tuesday.
The document shows that Europe’s biggest economy will have to limit growth in net expenditure to 2.25% year-on-year in 2025, down from 3.75% this year.
Given that medium-term economic growth is expected to be low, the debt sustainability analysis by the EU Commission implies that more ambitious financial and economic policies are needed to reduce the debt ratio towards the required 60%, the sources said.
Therefore, in addition to lowering expenditure growth, measures to strengthen potential growth and the sustainability of public finances are needed.
The bloc’s new budget rules, put in place in April, allow countries at least four years to reduce debt levels before they face sanctions that could include fines or a loss of EU funding.
The sources said the possibility of extending the adjustment period from four to seven years is currently being discussed within the government and with the European Commission.
In this case, the permitted expenditure growth would be higher in exchange for investment and reform packages agreed with the European Commission.
The medium-term fiscal plan shows that the general government deficit will be 2.5% of GDP in 2024, roughly the same as the 2.6% in 2023 but significantly higher than originally thought, before falling to 1.75% in 2025.
The need for adjustment is therefore now greater in order to achieve the path envisaged by the EU Commission for the coming years, the sources said.
The draft plan shows the debt-to-GDP ratio will rise slightly, from 62.9% of GDP last year to around 63.25% this year, and will remain at that level in 2025.
Spending on financial transactions has the effect of increasing the Maastricht debt-to-GDP ratio but is not included when calculating the Maastricht deficit.
(Reporting by Maria Martinez, Editing by Miranda Murray and Bernadette Baum, Kirsten Donovan)
By Maria Martinez