Why Germany wants to force debt cuts in EU spending rules

Economic powerhouse Germany wants EU members to be given binding targets to slash their debts under new spending rules being prepared by Brussels, a document seen by AFP on Thursday showed.

Published: 6 April 2023 16:24 CEST

Photo: picture alliance/dpa/dpa-Zentralbild | Patrick Pleul

In November, the European Commission, the EU’s executive arm, put forward plans to reform the Stability and Growth Pact that limits how much EU countries can borrow.

The pact says states’ public deficits should not go above three percent of gross domestic product, and debt should stay below 60 percent of GDP.

Brussels wants to give wiggle room to EU members to implement reforms and investments that contribute to the green and digital transitions, two priorities for the EU.

Germany, a staunch defender of budgetary stability, is calling for countries with debt ratios of over 60 percent to be made to reduce it by 0.5 percent a year, the proposal says.

EU states with their debts far above that level would have to cut it by one percent annually.

Berlin fears the reform envisaged by Brussels would overly relax the EU’s budgetary straitjacket and could undermine fairness within the bloc.

Greece has the highest debt to GDP ratio among the EU’s 27 nations at around 170 percent, followed by Italy near 140 percent and Portugal at 120 percent.

Germany is over 60 percent.

The EU’s executive is hoping to put forward draft legislation for the reform around the end of April that will then have to be negotiated with the deeply split member states.

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Intel’s delay

The US chip giant announced Monday it is postponing plans for its project in Germany for two years as it focuses more on the United States.

This is a blow to Berlin, which had pledged 10 billion euros ($11 billion) – a third of the cost – to build the production plant in the eastern city of Magdeburg.

While Intel’s own struggles are the immediate cause for the delay, it has also fuelled concerns that Germany is becoming less attractive as a place to do business.

In this year’s ranking of the most competitive economies by Swiss business school IMD, Germany slipped two spots to 24th, with taxes, bureaucracy and poor infrastructure cited as major handicaps.

Volkswagen stalls

Auto titan Volkswagen announced earlier this month it could take the unprecedented step of closing factories in Germany for the first time in its 87-year history.

Europe’s biggest carmaker is struggling with high costs, problems in the transition to electric vehicles, and fierce competition from local rivals in key market China.

Employees of German car maker Volkswagen (VW) protest at the start of a company’s general meeting in Wolfsburg, northern Germany, on September 4, 2024. Photo by Moritz Frankenberg / POOL / AFP

A week after VW’s shock announcement, BMW announced it was recalling 1.5 million vehicles due to problems with their brakes and downgraded its outlook for the year, also citing problems in China.

Steel storm

Efforts by Thyssenkrupp to spin off its loss-making steel division and get its business back on track ran into trouble last month when a host of senior executives quit in protest at the what they said was the unacceptable behaviour of the group’s CEO.

The row centres around plans to restructure the division, which operates Europe’s largest steelworks in Duisburg, western Germany.

The conglomerate wants to separate the steelmaking unit from its other activities, which include building submarines, as it faces higher manufacturing costs and competition from cheaper Asian steel.

It already announced that it plans to cut jobs in Duisburg and reduce production.

Firms face being gobbled up

Deutsche Bahn announced last week that logistics unit Schenker, traditionally one of its most profitable arms, is to be sold to Danish group DSV, with unions fearful it could lead to thousands of job losses in Germany.

Meanwhile Italian bank UniCredit is targeting a takeover of Commerzbank after building up a nine-percent stake in Germany’s second-biggest lender, a development that reportedly blindsided Berlin and has angered German unions.

Still some say such takeovers also highlight that German firms remain attractive, despite the woes of the broader economy.

Poor indicators

After starting the year on a positive note, recent surveys – from business morale to consumer confidence – have been on a downward trend, denting hopes of a strong rebound.

Some economic institutes have cut their forecasts, and now expect either stagnation or a slight recession for the whole year.

In its last official forecast in April, the economy ministry still expected growth of 0.3 percent this year, but it may downgrade that forecast when it updates the figure soon.

Commenting after a recent batch of negative data, ING economist Carsten Brzeski summed up Germany’s problems: “Years of stagnation, and underestimating technological trends and international competition do not come without consequences.”

By Sophie MAKRIS