Germany Pledges to Drastically Cut Public Borrowing by 2020
February 6, 2009
In the deal struck between Germany's 16 states and the federal government, net public borrowing on the federal level is to be capped at 0.35 percent of gross domestic product (GDP) from the year 2016, while the states will aim to eliminate any debt increases by the year 2020.
The targets, one of the world's most ambitious attempts yet to balance state budgets, were negotiated in return for a 50-billion-euro ($65-billion) fiscal stimulus package agreed last month to help withstand the global economic crisis and pull Germany out of recession.
Chancellor Angela Merkel's conservative Christian Democrats (CDU) are strong proponents of balancing the budget, while the Social Democratic SPD coalition partner has placed an emphasis on financial incentives to counter Germany's current economic crisis.
Under the fiscal stimulus package agreed last month, which experts predict could raise new borrowing to near 50 billion euros, public investment will be channeled into infrastructure projects such as roads, schools and railways.
The proponents of a balanced public purse, who belong mainly to the more conservative ranks of the CDU and the Bavarian CSU sister party, are wary of burdening the next generation with these costs.
The head of the CDU's youth arm, Philipp Missfelder, has said the cost of any new credits will invariably be borne by the young. "The stimulus package can't be paid for solely by future generations," he said.
The compromise, ultimately hammered out by Baden-Wuerttemberg's state premier Guenther Oettinger of the CDU, and the parliamentary leader of the SPD caucus, Peter Struck, is set to be finalized February 12.
Struck described the agreement Friday as a "magic moment of the cooperative federal state", which placed high expectations on Germany's wealthier states.
One of the challenges in the two years of negotiations leading to the new deal on public debt lay in the varying wealth of Germany's states.
Germany's poorest states, including the city states of Berlin and Bremen, were reluctant to tie themselves to such stringent budgetary discipline, while the richer states, led by Bavaria, were initially unwilling to offer the necessary financial help to meet debt repayments.
In the final compromise, the five poorest states will receive 900 million euros annually from the years 2011 to 2019, in return for a further tightening of loan requirements from 2020.
Bremen's mayor Jens Boehrnsen said Bavaria's key approval of the financial support for poor states was a "strong sign of solidarity."
By deferring these measures to the year 2020, it is hoped that these new budgetary requirements will not bite until the current economic storm has been weathered.