Germany’s plans to radically increase spending on defence and infrastructure have raised questions about whether the country is at risk of breaking EU fiscal rules. Camilla Locatelli and Vanessa Endrejat write that while enforcement of the rules is presented as a technical calculation, it is far less objective than it appears.

Germany, the long-standing architect and enforcer of the EU’s strict fiscal rules, has found a way to channel substantial public funds into military and infrastructure projects. Once again, it has managed to do this without formally breaking the stringent national fiscal rules that it also promotes at the EU level.

But while Berlin’s latest spending plans appear to circumvent its own hawkish fiscal rules, will they pass the EU’s surveillance tests? Although some observers anticipate that the EU’s seemingly objective fiscal rules will prevent this from happening, others are calling for them to be overhauled. However, while the EU’s rules appear objective, they often rely on technical and sometimes ambiguous criteria.

Germany’s contentious “off-budget” strategy

Just over a week after entering office, the new German government, led by Friedrich Merz, announced a €500 billion plan for a special “off-budget” fund to boost rearmament and infrastructure spending. The fund is in good company as Germany already has 29 off-budget funds amounting to €869 billion.

As in the past, Germany has used off-budget funds to finance long-term policy goals outside of its public finances. However, these funds have previously been criticised by domestic and international actors. Just last year, the German Constitutional Court declared part of the country’s budget void after the German government changed the accounting of its off-budget funds, leading to a budget freeze for 2023 and significant deficits for 2024. This year, the government reformed its own fiscal rules to enable the new fund to be off-budget and in line with German spending rules.

Commentators have rightly observed that while Germany has the political flexibility to reinterpret its national fiscal rules through a parliamentary majority, it is subject to a different reality at the EU level. Here, fiscal oversight is governed by a more rigid, technocratic framework. This tension has become particularly apparent since the recent reform of the Stability and Growth Pact, which strengthened the combination of numerical targets with medium-term spending trajectories. Germany’s continued use of off-budget investment funds risks conflicting with this more centralised, technocratic approach.

The apparent mismatch between Germany’s recent spending initiatives and the EU’s existing fiscal rules has led some commentators to call for the fiscal framework to be overhauled again. This would allow investments in areas such as the military and infrastructure, as seen in Germany, to be adopted more widely across the Union. In contrast, others have welcomed the EU’s stricter and seemingly more objective assessment of member states’ fiscal positions.

These differing views are striking, given that the Stability and Growth Pact, the backbone of EU fiscal rules, was only reformed last year. Although this reform aimed to provide a simpler, more holistic view of public finances, significant room for technocratic discretion remains. This is because, unlike in Germany where fiscal discretion stems from the government’s ability to revise national fiscal rules with a parliamentary majority, at the EU level it stems from the technical nature of fiscal oversight.

We argue that commentators underestimate the technical complexity and opacity that shape these assessments across member states. This is particularly evident in the question of which spending is included in the EU’s fiscal calculations and how the rules are applied in practice. Despite promises of greater clarity, the system continues to rely heavily on technocratic judgement when calculating debt and deficit indicators, and when conducting debt sustainability analyses.

Calculating debts and deficits

On the one hand, the calculation of government debt and deficit figures is often considered one of the most technical and objective aspects of fiscal policy. After all, these figures are compiled by national statistical offices and verified by Eurostat, the EU’s official statistics agency.

Their work centres on deciding which state policies should be included in government debt. They also identify off-balance sheet policies where governments behave like profit-seeking market actors and do not negatively affect public finances, for example in profitable state-owned companies or profitable development banks.

However, the process is not always straightforward, and statisticians often have to use their judgement based on incomplete information or data. The statistical community regularly discusses contentious cases to ensure coherent rules, and the final decision on what is included in government debt rests with Eurostat.

Germany’s new investment funds will probably be included in these figures. However, past cases show that it can take years to finalise these decisions, which delays political debate and reduces public scrutiny. One example is Italy’s “superbonus” tax benefit scheme introduced during the COVID-19 pandemic, which was ultimately included in the official figures only two years later under a new government and amounted to a staggering 10% of GDP (€219 billion).

Furthermore, there have been cases where EU regulations have treated off-balance-sheet funds more leniently than international standards despite the EU having one of the world’s strictest fiscal governance regimes. Public-private partnerships (PPPs), for example, have long been favoured under EU rules, diverging significantly from international accounting practices.

Negotiating room for fiscal spending

On the other hand, the implementation of these new, intricate and technical regulations is not without its complexities. It is also more likely to involve technical negotiations between the EU and member states. Rather than providing an objective framework for the application of the rules, such negotiations have proven to result in ad hoc applications of those technical constraints. This was a problem with the previous version of the Stability and Growth Pact and the recent reform does not seem to have put a stop to it.

The adopted rules used Debt Sustainability Analysis to provide an objective basis for evaluating public finance interventions, focusing on the quality of spending in the long term rather than just numerical targets. However, the technical complexity of its estimation means there is scope for negotiations between technocrats regarding the calculation parameters. These negotiations could be used to justify a stricter or more lenient approach to fiscal spending.

Moreover, the new system of EU fiscal rules includes several spending clauses for “public investment projects”, which can be used to achieve public spending targets. These targets can be negotiated politically and bilaterally between the Commission and member states. This creates an opportunity for technocratic negotiations on spending exceptions to be hidden from political oversight. These public investment objectives also tend to conflict with the ever-present numerical targets, which casts doubt on their effectiveness in providing the necessary investment space.

While these clauses could offer space for public investment programmes such as the one suggested by Germany, the Commission’s approach to the plans already submitted has pushed countries to commit to significant consolidation programmes: a more idiosyncratic exception for Germany would spark controversy in other EU member states and damage the credibility and fairness of EU fiscal rules.

The limits of technical fiscal governance

Germany’s shift away from austerity challenges key elements of the recently reformed EU fiscal surveillance system. Although EU fiscal rules have attempted to pay more attention to public investment, the strict numerical target-based logic of the system has limited its ability to incorporate new forms of fiscal intervention.

Furthermore, while this new system may present itself as objective by relying on technical fiscal rules and complex economic indicators, its surveillance and concessions to more expansionary fiscal policy are often based on technocratic negotiations insulated from political discussion. This can ultimately result in the rules being applied unevenly and restrictively.

Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Union