Germany to avoid EU punishment for breaching budget rules
Exemption for higher defence spending will help Berlin avoid corrective measures, says bloc’s economy commissioner
Germany will escape punishment for breaching strict EU budget rules thanks to an exemption that accounts for its increase in defence spending, Brussels’ top economic official has said.
Europe’s largest economy is forecast to record an excess deficit of 3.3 per cent in 2025, but this is fully accounted for by an increase in defence spending, EU economy commissioner Valdis Dombrovskis told the Financial Times. Therefore Berlin “is likely not to end up in [the] excessive deficit procedure”, he said.
The EU rules — which Germany helped design — dictate member states must keep their budget deficit within 3 per cent of GDP and public debt below 60 per cent of GDP. A country could face fines if it does not take corrective measures to meet the rules.
A final assessment of Germany’s position will take place next spring when full data for 2025 is available, Dombrovskis said, adding: “We have to see the execution, because it’s close [but] if everything holds, then it should not be the case for this year’s budget.”
Berlin’s narrow escape signals a willingness from Brussels to allow the bloc’s largest economy to spend lavishly at a time of higher defence needs and low growth.
Germany plans to exceed a 3 per cent annual deficit threshold this year to the end of 2027, according to its own fiscal plan.
But the “national escape clause”, invoked by Germany and 15 other EU countries, allows member states to spend up to 1.5 per cent of their output on defence over four years without breaking rules.
The clause was added at Germany’s behest this year to accommodate higher defence spending, given US demands on EU countries to boost their own security and a new Nato target to spend 5 per cent of GDP on defence by 2035.
The request was a stark about-face from Germany, which during a recent reform of fiscal rules asked for strict safeguards for countries that breached EU debt and deficit thresholds.
In negotiations over the past few months with Berlin over its fiscal plan, Brussels granted Germany a right to “back load” measures to reduce its budget deficit towards the later years of its plan.
Brussels has also accepted Germany’s estimate for the potential growth impact of German Chancellor Friedrich Merz’s €500bn infrastructure investment fund and increased defence spending at 0.9 per cent on average until 2041 — up from 0.3 per cent in 2025 — something which German officials stress is allowed.
“We are not overstretching the rules,” said Armin Steinbach, chief economist at the German finance ministry.
Brussels’ leniency towards Berlin is due to its relatively low debt levels, projected to come in only slightly above the EU’s 60 per cent threshold at 63.8 per cent of GDP this year. Berlin’s investment is also expected to boost growth and generate positive spillovers for the bloc.
“The European Commission has been asking Germany to increase its infrastructure investment for years, and so now we see this actually happening,” Dombrovskis said. “Our recommendation is . . . to actually increase defence spending in coming years.”
But critics said the commission was prone to bending rules for Germany and other large EU economies.
“The commission has been quite lax in its interpretation of the fiscal rules towards Germany,” said Guntram Wolff, a senior fellow at think-tank Bruegel and a professor of economics at the Free University of Brussels.
“At some level, that is understandable given that debt levels are low and also the deficit levels are small compared to France. At another level, it is weakening the just reformed fiscal rules.”
Brussels has a patchy history of enforcing the rules, designed in the late 1990s, with both Paris and Berlin falling foul of them in the early 2000s without incurring sanctions.
The commission has until September 11 to formally assess Germany’s fiscal plan, but officials are confident it will be approved.