RPT-COLUMN-Maastricht goalposts need shifting to allow Germany boost: Mike Dolan

By Mike Dolan

LONDON, April 1 (Reuters) - Germany's need to expand its budget could fundamentally alter EU debt guidelines for the first time since the single currency was born 26 years ago.

Germany's dramatic decision this year to rush through historic fiscal reforms to make way for massive spending on defence and infrastructure has raised questions about just how much of the stimulus it can deliver without running afoul of EU monitors.

Some economists think the euro zone's long-standing debt/GDP "reference rate" of 60% could and should be lifted to 90% to ensure nothing will preclude more German spending, as this splurge is now seen as necessary to support an entire region scrambling to defend itself and navigate a rapidly escalating trade war with the United States.

These economists also argue that boosting long-term growth prospects is apt to do as much to make higher public debts sustainable as would adhering to arguably outdated public debt targets. Even credit rating agencies agreed on that when assessing the potential impact of Germany's removal of its self-imposed "debt brake".

Jeromin Zettelmeyer, director at the Brussels-based think tank Bruegel, last week made the point that Berlin's move should be sustainable over the coming decade if the increase in debt is accompanied by an increase in growth potential.

But, even so, German debt/GDP would very likely have to rise to 100%. And, as it stands, that breaches EU rules.

Germany should be able to boost defence spending and still stay within bounds, given the exemptions worth 1.5 percentage points of GDP. But current EU rules would likely prevent it from spending the 500 billion euros ($540.80 billion) earmarked for infrastructure - more than half of the near 1 trillion euro plan.

"To allow higher German spending, the rules may have to change - for example by setting the 'reference value' for debt from 60% to 90% of GDP," Zettelmeyer wrote. "The fact that this would be triggered by a policy change in Germany is unfortunate. But it would be good for all of Europe."

HOUND TURNED FOX

There is indeed a great irony that a shift of EU budget goalposts comes at the behest of Germany, the main instigator of such strict rules back in the late 1990s and the chief enforcer in the years since.

The euro's founding Maastricht Treaty was signed in 1992, after which member states set about agreeing on accompanying budget rules, which eventually made up the so-called Stability and Growth Pact (SGP) signed in 1997.

The SGP stipulated that member states keep their annual budget deficits within 3% of annual output, with a view to keeping overall debt/GDP piles sustainable and targeted towards a 60% "reference rate".

When the euro launched in 1999, all but two of the 11 nations involved had debt/GDP levels at or under 60%. Italy and Belgium both had debt/GDP ratios in excess of 100% but were still allowed to join.

But today, fewer than half of the current 27 euro members pass this test, with Italy, France, Belgium, Spain, Portugal and Greece now clocking debt ratios above 100% of national output.

The overall euro debt/GDP share came in at 88% last year, just below the 90% reference rate now being bandied about.

Annual monitoring of budgets has been relatively strict over the years, involving formal warnings on primary and structural balances leading up to actual fines. Exceptions and exemptions have been proposed and made over the years, and the entire pact was suspended temporarily in the wake of the pandemic.

But the rules were given extra heft during the post-pandemic period.

The European Central Bank made compliance with them necessary for access to its newly-designed Transmission Protection Instrument, essentially a bond-buying ECB backstop for countries caught up in market contagion.

If the debt/GDP ratio target were loosened, then it may make it somewhat easier for more heavily indebted countries to access ECB supports over time, potentially allowing for some reduction of borrowing premia as German core rates push higher with its debt/GDP ratio.

Higher sovereign debt may seem an odd way to make the bloc more credit-worthy, but it could if it spurs meaningfully higher growth. And, relatively speaking, the EU still looks less profligate overall than many of its global peers. The United States' debt/GDP is running in excess of 120%, Japan's is above 260% and Britain is on course to eclipse 100% as well.

Ultimately, pressing an EU debt brake just when the German one has been lifted would be self-defeating. Hoisting the already nebulous debt target to 90%, on the other hand, would seem to make more sense.

The opinions expressed here are those of the author, a columnist for Reuters

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