New fiscal rules allow defence-related costs to be partially excluded from deficit limits.
Germany is expected to sidestep formal penalties from the European Union, even if it exceeds the bloc’s 3% budget deficit limit in 2024.
According to Valdis Dombrovskis, the European Commission’s Executive Vice-President for the Economy, Germany’s projected deficit — estimated at 3.3% of GDP — is unlikely to trigger the EU’s excessive deficit procedure. In an interview, he described the overshoot as “marginal,” noting that the breach is primarily driven by increased defense spending.
The EU’s fiscal rules are designed to ensure financial stability by capping national deficits at 3% of GDP. However, under recently introduced reforms, the Commission has taken a more flexible approach to enforcement.
Dombrovskis told the Financial Times that the procedure should not apply to Germany’s 2024 budget as long as current conditions hold.
That position reflects a broader relaxation of European fiscal norms that the European Commission has rolled out under new rules put forward earlier this year.
Commission excludes defence costs from deficit rules
Much of Germany’s additional spending stems from its pledge to strengthen its military and security infrastructure.
Germany has pledged to modernise its armed forces since the war in Ukraine. The country committed €100 billion to a special defence fund in 2022 and has consistently maintained the defence budget as its top priority as geopolitical tensions rise.
The tiny excess in its deficit this year, 0.3 percentage points above the EU’s limit, is entirely related to this defence spending, say officials from the EU.
Under the EU’s reformed fiscal framework, which member states agreed to early in 2024, some forms of public investment, in areas such as defence and climate, can be excluded when calculating budget shortfalls.
Germany’s government has insisted its budget plans do not breach the “spirit” of EU rules, insisting its spending decisions are prudent and needed.
EU to decide on Germany’s deficit in spring 2025
Despite the conciliatory tone, the European Commission has not yet concluded. Dombrovskis said a formal evaluation would be done in the spring of 2025 once full-year budget data becomes available. He added that if everything goes as planned, there would be no need to trigger the excessive deficit procedure.
The excessive deficit procedure (EDP) is a mechanism under which the EU requires countries to take corrective action when they exceed the 3% limit. Failure to adhere nationwide could eventually result in fines and other penalties.
Germany, one of the EU’s economic heavyweights, has long favored fiscal discipline. What’s more, the former German government had a hand in designing the actual rules under which the math provides some flexibility regarding extraordinary defense spending.
This moving of the goalposts illustrates how evolving regional and global dynamics contribute to reshaping European fiscal policy.
To date, at least, Germany has escaped that kind of scrutiny. The moral squeeze is off, but Brussels will continue to peer over its shoulder at its fiscal direction.
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